The fall in Consumer Price Index (CPI)-based inflation to 3.4% in August is a bit of good news, which is rare these days. Unfortunately, this low inflation number is very likely to be overtaken by events.
The main reason for the low inflation rate in August is very low food inflation. But on Wednesday, the cabinet announced a new procurement scheme designed to ensure that farmers benefit from the higher minimum support prices announced for various crops. It is likely to lead to higher food inflation once the procurement process starts.
As expected, inflation went up for the fuel and light component of CPI.
Note that this went up despite a rise in the rate of inflation in August 2017 compared to July 2017—in other words, despite a favourable base effect.
The chart shows that while core inflation has abated a little, it remains elevated and there’s a bit of a base effect there, too.
More important than nitpicking about base effects, of course, is the fact that crude oil prices are high and the rupee has nosedived, which will add to inflationary pressures. Moreover, what matters is that all these factors will fan inflationary expectations, says Gaurav Kapur, chief economist at IndusInd Bank Ltd.
In short, little comfort can be taken from the August inflation print, because the future trajectory of inflation is likely to be very different.
Needless to add, the Reserve Bank of India will look through any base effects and take future inflationary pressures into account. Of course, protecting the currency will also be a factor in the central bank’s decision on interest rates.