Inflation trouble for RBI

CRISIL's Core Inflation Indicator (CCII), a measure of demand-side pressure on prices, fell to a four-year low of 2.6 per cent in August. From a high of 6.5 per cent in September last year, CCII's sharp decline to 2.6 per cent in less than a year is reflective of the weak domestic demand. Data released at the end of last month showed that private consumption in the economy grew by a mere 1.6 per cent in April-June 2013, while fixed investment fell by 1.2 per cent during the same period, compared with the year-ago period.

The decline in CCII in August was driven by a fall in manufactured food inflation to a 30-month low of 1.7 per cent, due to the high base of August 2012. High base in manufactured food inflation is expected to last for much of the remaining financial year and will continue to keep CCII at relatively low levels in the coming months.

The index, however, continued to remain above non-food manufacturing inflation, the Reserve Bank of India (RBI)'s measure of core inflation. Non-food manufacturing inflation, which stood at 1.9 per cent in August, tends to underestimate demand-side pressures in the economy, as it includes metals prices, which have been falling since April 2013.

Given that metal prices are largely influenced by changing global demand and volatility in exchange rate, rather than domestic demand pressures alone, metals must be excluded while measuring core inflation - as is done in CCII.

While a fall in core inflation measures indicate weakening of demand pressures in the economy, overall Wholesale Price Index-based inflation surged to 6.1 per cent in August on the back of over 18 per cent inflation in primary food articles. Rising inflation will make it difficult for RBI to cut repo rate during the rest of 2013-14.