India’s Chief Economic Advisor calls recent inflation spike transitory

A surge in onion prices contributed around 70 basis points to retail inflation that scaled a 68-month peak of 7.59 per cent in January, chief economic adviser Krishnamurthy Subramanian said, stressing that the latest spike in inflation is “transitory” and is substantially driven by volatile vegetable prices and an unfavourable base, reported Financial Express..

He also pointed at a healthy co-relation of 0.53 between the Purchasing Managers’ Index (PMI) and the Index of Industrial Production (IIP), based on data for over seven years, and indicated that the surge in the PMI index in January would augur well for factory output growth. The PMI for manufacturing scaled a near eight-year peak in January and that of services jumped to a seven-year high. The IIP, however, shrank 0.3 per cent y-o-y in December 2019, having reversed a modest rise in the previous month and recording its fourth contraction in five months.

Subramanian expected retail inflation to come down to a more realistic level of 4-4.5 per cent by July, as the effect of an inconducive base wanes. Fresh arrivals of crops, especially onion, in March and higher vegetable output will have a soothing effect on inflation in the coming months.

Core inflation, meanwhile, stood at 4.2 per cent in January, against 5.4 per cent a year before, reflecting a certain degree of demand compression in the economy, Subramanian said. This means the underlying inflationary pressure in the economy isn’t really a matter of grave concern yet.

The central bank has also projected food inflation to moderate with higher arrival of crops. Crude prices are expected to remain volatile, with greater downside risk. It has forecast headline retail inflation to drop to 6.5 per cent in the last quarter of this fiscal and remain in the range of 5-5.4 per cent in the first half of FY21. In the third quarter of the next fiscal, inflation is expected to drop substantially to around 3.2 per cent.

Shekhar Ghosh is consulting editor, Indoasiancommodities.com. He has edited and written for publications like Business India, Business Standard, Business Today, Outlook and many other international publications. He can be reached at shekhar.ghosh@indoasiancommodities.in.

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