Consumer price inflation slipped below the central bank’s lower tolerance level to 1.54% in June and industrial output growth decelerated to 1.72% in May, prompting Chief Economic Advisor (CEA) Arvind Subramanian to hint at the need to reboot monetary policy assumptions including ‘systematic inflation forecast errors’ he had red-flagged earlier.
“The number of 1.54% is historically low and reflects the firm and ongoing consolidation of macro-economic stability,” Mr. Subramanian said soon after the data was released. “The last time we saw such inflation — according to a slightly different CPI series (IW) — was in 1999 and before that in August 1978.”
Growth in the Consumer Price Index slowed for the third consecutive month in June, largely driven by a contraction in food prices by 1.17%. Growth in the Index of Industrial Production slowed for the second consecutive month, with consumer durables’ production contracting sharply again in May by 4.55% following a contraction of 6.05% in April.
“This low, heartening (CPI) number is consistent with our analysis for some time now — and which will be fully elaborated in the forthcoming Survey — of a paradigm shift in the inflationary process to low levels of inflation, a shift that I think has been missed by all, reflected in the large one-sided, and systematic inflation forecast errors that have been made,” Mr. Subramanian added.
“Clearly, this low number and what it implies about underlying price pressures — as well as the latest IIP data just released — is something that, I am sure, all policy makers will reflect upon very, very carefully,” the CEA said.
“The trends in the overall consumer price index and in food prices were expected, but have been sharper than anticipated,” D.K. Srivastava, Chief Policy Advisor at EY India said. “In my view, it is the outcome of demand and supply factors. Demand is subdued and supply is buoyant. That is why there is a sharp downward trend.”
Inflation in the clothing and footwear category of the CPI slowed to 4.17% in June from 4.4% in May, with the fuel and light category witnessing a sharper slowdown, with inflation in June at 4.54% from 5.46% in May.
The housing segment saw inflation slowing to 4.7% from 4.84%, while inflation in the pan, tobacco and intoxicants category slowed to 5.62% in June from 6.17% in May.
Low demand
The mining and quarrying segment of the IIP witnessed a sharp slowdown in May, contracting 0.89% from a growth of 3.23% in the previous month. Activity in the manufacturing sector also slowed to 1.21% from 2.35% over the same period. “The subdued growth in manufacturing is worrying as some of the major sectors like capital goods, automobile and textiles have shown degrowth,” A Didar Singh, Secretary General of FICCI said.