Has India's Inflation Rate Really Fallen Off Its Peak, Signalling Lower Prices?

However the problem that is worrying policymakers is that this may well be a false dawn. And they may have far more work left to tame the inflation genie and bottle it back.

False Comfort From Base Effect ?

A  spike in both general inflation and food prices in July 2023 when the consumer price index or the inflation rate had shot up to 7.44 per cent and CPI’s food inflation had gone up by an extraordinary 11.51 per cent meant that the base on which this year’s July inflation has been calculated was extremely high.

The resultant calculations showed what statisticians would call a “bias towards a false sense of comfort from a base effect which has helped deflate numbers and results”.

The ‘Daal Chawal’ Conundrum 

From the common man’s point of view food prices, which pinches him most, remains high. A patchy Monsoon which has brought excess rains in many districts and lower than average rainfall elsewhere has ensured food prices have continued to rise. 

Prices of pulses, a staple in all Indian households, have risen by a massive 14.77 per cent, cereal price have gone up by 8.14 per cent. Vegetable prices rose 6.83 per cent, while prices of  meat and fish rose by nearly 6 per cent.

The effect of these increases was felt most by poor households. On an average nearly half of the monthly expenditure in rural areas is on food. While it’s about four parts out of ten in urban areas. 

The percentage spent by poor households on food is obviously far higher than that by middle class or richer families. All this in simple terms means that the costlier ‘daal-chawal’ (lentils and rice) phenomenon will continue to bewilder people when told that the inflation rate has dropped.

Cheaper Crude From Russia Helps Pull Down Inflation

Interestingly, the fuel and light index has actually gone down, which too pulls down the overall inflation rate and shows us a false dawn.  

The fuel and light index has shrunk by 5.48 per cent. India’s crude import costs which had stood at nearly US $ 90 a barrel in April 2024 have come down to nearly US $ 84 in July this year and to about US $ 77 in August 2024.

The cost reduction came as India increased its purchase of cheaper Russian crude oil, picking up more than 40 per cent of all shipments out of that country in first six months of 2024. As everyone knows Russia is selling cheap because its traditional buyers in the west have been boycotting it ever since it invaded Ukraine starting the first European war since World War II.

RBI’s Repo Rate Postscript

The lower inflation rate reported in July has also to be seen in the context of a push towards lowering of interest rates by the Reserve Bank of India. The central banker wants inflation to be below 4 per cent before taking up the question of reducing the Repo or the overnight lending rate to banks from the current 6.5 per cent as inflation targeting is a major remit for the RBI.

However at it last meeting too, there was a split opinion with two members of the Monetary Policy Committee seeking a slash in rates. If the August rate too is reasonably low, then the MPC at its October 7-9 meeting may well cut the rate.

That in itself may not spur inflation though the focus on targeting price rise will certainly shift if the key policy rate is cut with headlines screaming it will give India a growth impetus.