Core inflation still remains elevated, may not fall below 5% in FY24

Along with overall retail price inflation, core inflation (relating to the non-food, non-fuel items) came down in April below six per cent for the first time in 11 months.

Core inflation fell to an 11-month low of 5.7 per cent in April from six per cent in the previous month. Overall inflation declined to an 18-month low of 4.7 per cent in April from 5.7 per cent in the previous month. This was the second month in a row when overall inflation came down below the Reserve Bank of India (RBI)'s upper limit of six per cent.

The core inflation has remained stuck in the range of 5-6.6 per cent for over two years.

Though it fell to an 11-month low in April, it is still elevated at 5.7 per cent, particularly considering that overall inflation is just 4.7 per cent.

There are two ways of calculating core inflation in the consumer price index (CPI). One way is not to take out petrol and diesel used in transport such as trucks, autorickshaws, etc while calculating the core inflation, the other is to take out this fuel too. The figures given here are based on the latter's calculations.

While the food inflation came down drastically in recent months, other items still faced higher inflation. For instance, food inflation fell to a 17-month low of 3.84 per cent in April this year from 4.79 per cent in March. Though fuel inflation also came down to a 25-month low of 5.5 per cent in April from 8.79 per cent in March, it was only a bit lower than the core inflation.

Food and fuel inflation is considered volatile in nature, but the core inflation is structural. That is why its movement is closely tracked.

In the past one month, very high overall inflation was associated with the core inflation of about 5.5-5.7 per cent. That was because food and fuel inflation was too high. For instance, the core inflation was 5.5 per cent in May, 2022 but overall inflation was 7.04 per cent. That month, fuel inflation was 9.54 per cent, and food inflation at 7.97 per cent.  

If we take a longer period of the past three years, there was also a time when core inflation was higher than overall inflation as is the case now in recent months. For instance, overall inflation was just 4.1 per cent but the core inflation was 5.2 per cent in January, 2021. This was because the fuel inflation was just 3.87 per cent and food inflation 1.96 per cent.

Now as the food and fuel inflation is on a downward trajectory, the still high core inflation remains the main impediment to bringing overall inflation further down, assuming the normal monsoon and no further deterioration of the external situation.

Within core inflation, that relating to personal care products and services, health services, household goods, and services, clothing, and footwear remained over six per cent in April this year.

In fact, inflation in personal care products and services rose to nine per cent in April, 2023 from 8.25 per cent in March. A 22-month high retail price inflation in gold ornaments pushed the rate of price rise in the personal care segment.

This was despite the fact that the segment, called personal care and effects, had a high base effect in April last year. Inflation in the segment, which has a weight of 4.25 per cent in the consumer price index, stood at 8.62 per cent that month.  

The CPI-based inflation rate in gold ornaments rose to 13.88 per cent in April, from 10.68 per cent in March.

Gold prices were high in April. According to a report by news agency PTI, gold prices hovered around Rs 60,000 per 10 grams around Akshay Tritya on April 22. Those have risen from around Rs 50,000 during Dhanteras on October 22 last year.

Gold is considered a safe haven asset and as such its prices have soared due to global economic uncertainty.

Though health inflation fell in April compared to March, it still remained over six per cent. Inflation in this important segment fell to 6.32 per cent in April from 6.59 per cent in March.

The same is the case with household goods and services, clothing, and footwear.

However, some segments such as housing and education have experienced lower inflation.

Anil Sood, professor, and co-founder of the Institute for Advanced Studies in Complex Choices said housing and education groups with a combined weight of 27.3 per cent have experienced far lower inflation at about four per cent during the last three years.

He said there is a strong correlation between food and fuel groups on the one side and core inflation on the other side, particularly when food and fuel inflation has been persistently high during the last three years.

 

According to Sood, the food and beverage group has a correlation of 0.42 with miscellaneous services, a part of core inflation. Similarly, the fuel and light group's correlation with the miscellaneous services group is observed to be 0.60 per cent.

Likewise, the correlation between personal care and effects and fuel and light is observed to be even higher at 0.75.

"In short, if food and fuel inflation is high, we expect the core inflation also to be high, particularly for products and services where the manufacturers enjoy higher pricing power-- personal care and effects etc," Sood said.

Experts believe that the core inflation may remain in the range of 5.3-5.5 per cent in 2023-24.

Aditi Nayar, Icra chief economist, said the core inflation may display monthly volatility partly related to the base effect.

"However, we do expect some of the major components such as miscellaneous items and clothing and footwear to record a lower inflation in FY24 relative to FY23 which should help to soften the annual average core inflation," she said.

Madan Sabnavis, the chief economist of Bank of Baroda, said, "In my view, core inflation will tend to be stable in the region of 5.3-5.5 per cent for the year while moving up in certain months as prices get readjusted especially for the miscellaneous category."

The month-on-month increase will be important as this has been inching up in the last couple of months, he said adding while the base effect will moderate the core inflation numbers, the month-on-month increase will prop them up."