Headline inflation is trending down towards the government’s 6.8-7% projection by March 2013, which raises expectations that the central bank can begin easing interest rates as early as this quarter. The December data for wholesale prices shows inflation dipping to 7.18%, the latest in a secular decline from 8.07% in September 2012. More important for policymakers, core inflation — minus the more volatile food and energy prices — has decelerated faster over the same period: from 6.47% in September to 5.04% in December. The finance ministry had in December observed that the frequency distribution of commodities whose prices were rising above 10% annually had shrunk appreciably in the first half of 2012-13, and inflation control measures now needed to focus on the more obdurate items in the wholesale price index.
These would, of course, include food and energy. Food inflation has, in fact, climbed from 8.06% in September to 11.16% in December. Grain prices in December were up 19.02%, vegetables 23.25%, pulses 17.57% and the politically sensitive onion 69.24%. Energy inflation, too, is trending down from 12% in September. But at 9.38% it is still fairly sticky.
The Reserve Bank of India will be looking at core inflation, which is what it had set out to tame two years ago when it embarked on a severe interest rate tightening cycle that has slowed the economy considerably. It expects March inflation at 7.5% yet it has indicated credit conditions could be relaxed before that. Both the government and the central bank have conceded that food inflation is now structural and in need of deeper reforms to raise supplies from the farm. Again, the mounting subsidy bill does not leave the government elbow room to keep suppressing diesel prices. The fight against inflation won’t be over till food and energy prices are tamed.