The decline in inflation is not surprising. With improvement in monsoon performance since August 2014, ASSOCHAM had anticipated normalization in food prices to aid the disinflationary process.
However, the decline in inflation runs beyond the salubrious impact of food prices. Softening of global commodity prices, especially crude oil, has started to have a positive trickle down impact on imported inflation. In addition, it is heartning to note that core inflation, a proxy for demand side pressures, has also been moderating steadily, both at wholesale and retail levels.
Lack of any meaningful turn in demand conditions is also manifested in the recently released Industrial Production data, wherein after recovering to 4.4% in Q1 FY15, IIP growth has once again slumped to 0.4% during Jul-Aug 2014.
ASSOCHAM feels that these developments have important implications for inflation going forward: Food and fuel inflation are likely to moderate further as kharif output comes on board and global commodity prices remain benign With output gap persistently remaining negative, core inflation would ease further
The Chamber believes CPI inflation would remain significantly lower than RBI's near term target of 8% in January 2015. With the Government making further progress towards boosting infrastructure investment and reviving business climate, CPI inflation could in a similar vein undershoot RBI's medium term target of 6% in January 2016.
ASSOCHAM is confident that effective coordination between monetary and fiscal policy, coupled with pragmatic governance, will facilitate sustained disinflation in the economy, thereby allowing monetary accommodation to begin from early 2015.
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