Consumer inflation measured by CPI for December 2018 clocked in at 6.17 percent. This is lower than market expectations of December CPI at 6.5 percent, thanks mainly to a massive decline in perishable food prices. This may well be the lowest number for FY19 – as the electricity price increase is likely to be notified in January.
The reasons why CPI has stayed north of 6 percent for three months running are known to one and all. One is the infamous calculation of gas price increase impact on CPI – which was later revised at 85 percent. The revision still erred on the higher side, which is expected to keep the numbers inflated in the months to come, owing to the high base (read: CPI rationalized – now methodology’s turn; published Nov 16, 2018).
The sub-index of housing, electricity, gas etc continued to be the single largest contributor to the overall inflation – with over one-third of total impact. The house rent index will see its next quarterly revision in January, and from the evidence available of late, that too may well be skewed to err on the higher side – based on the simple average formula for all cities, regardless of population size or consumption. Should power tariffs be announced in January as well – there are all chances that the CPI may clock in at north of 7 percent in January 2019.
On the other hand, perishable food items have been the saving grace in the last two months – almost offsetting the price increase in the higher weighted non-perishable food category. Vegetables especially, have become considerably cheaper, nullifying the rise in other high consumption category food items. Clarity is lacking on the Supreme Court’s interim decisions on private school fees. If the order is applicable across the country – one may see a big respite in education prices too in the coming months.
Transport sector is the other one that has continuously risen of late – and rose by 18 percent year-on-year in December 2018. This is despite considerably lower international oil prices. But the much devalued rupee now, means petroleum products will still be priced higher than yesteryear, even at significantly lower sales tax rates.
Even if the oil prices go down further from here, the government would ideally like to use this opportunity to beef up its tax revenue – on which, it is well behind target. The sales tax collection on just two key petroleum products, MS and HSD, has been lower by approximately Rs65 billion in the first six months of FY19. Expect the petroleum prices to stay around current rates, even if international oil price goes further south.
The CPI has so far averaged 6.05 percent in the first half of FY19. Electricity and transport are sure to go dearer in the second half – which should take the CPI at least 100 bps further – to average around 6.5 percent for FY19 – up from 3.92 percent in FY18.