What inflation numbers mean
October data brought some good news. But policymakers cannot afford to rest easy, yet
October inflation numbers have brought some good news on the price front for policymakers — and after a long time. Retail inflation was in line with analyst estimates and the Reserve Bank of India (RBI) governor’s projections and moderated to 6.8% from its September print of 7.4%. RBI expects retail inflation to moderate further going forward. Wholesale inflation grew at 8.4% in October after 19 consecutive months of double-digit growth. While there is a base effect at play in its moderation, the psychological impact of a year-and-a-half-long double-digit inflation run ending cannot be underestimated.
Does this mean policymakers can breathe easy on the inflation front? Far from it. Core inflation — it measures the non-food non-fuel component of the Consumer Price Index basket — remained sticky around the 6% mark. Cereal prices could emerge as the next pressure point on the food inflation front. If this were to happen, it would nullify the gains of prices of such things as edible oil coming down. The other thing worth watching out for is the external monetary and price environment. If advanced economies, especially the United States, continue to pivot towards a more hawkish approach in monetary policy, emerging economies, including India, will have to walk the extra mile on monetary tightening to send the correct signals to international capital and currency markets even if it comes at the cost of generating extra headwinds for the ongoing economic recovery. The most critical factor in containing inflation will be the government’s ability and willingness to cushion the impact of rising cereal prices. The expansion of food grain entitlements under the Pradhan Mantri Garib Kalyan Yojana has played a key role in mitigating the inflationary impact of what is an extraordinarily tight market in cereals. But the government could be running out of fiscal space and food stocks to continue with the scheme once the extension ends in December. The fiscal benefits of ending the scheme notwithstanding, it could trigger a wage price spiral, especially for the bottom of the pyramid.
Still, there is no reason to believe things will necessarily turn bad for the economy. The experience of the past few months suggests that the monetary and fiscal policy arms of the government have worked in tandem to strike a correct, sometimes sequential, balance to protect growth while pursuing inflation targeting. It is necessary that this synergy continues going forward.