The tale of two cores in retail inflation

Stripping the core inflation of more fuel components embedded in the transportation index of services group shows that core inflation has eased to 4.3% in March


Graphic: Naveen Kumar Saini/Mint
Graphic: Naveen Kumar Saini/Mint

The latest print of Consumer Price Index (CPI)-based inflation has cheered some market players and put many on guard as well. The fact that retail inflation rose to 3.81%, mainly driven by higher fuel prices and undershot the Reserve Bank of India’s (RBI’s) 4% target, was an expected outcome. The central bank is mandated to maintain inflation within the 2-6% band.

Given that RBI has flagged off several upside risks to inflation in the latest monetary policy statement, economists are closely watching core inflation, which has been a perennial bugbear for the central bank.

But for some strange reason, economists are tracking two sets of core inflation. Those who track the core inflation which excludes the food and fuel groups observe that price pressures have held up even though they are lower than what they were two years ago. Core inflation was 4.92% for March, higher than 4.86% in the previous month. This is enough to concur with RBI that inflationary pressures do not warrant an accommodative policy stance. Indeed, for fiscal year 2016-17, core inflation has never been below 4.6% and the bulk of the fall in inflation has been through food prices.

Let us now come to the other core. Stripping the core inflation of more fuel components such as diesel and other vehicle fuels that are embedded in the transportation index of services group shows that core inflation has eased to 4.3% in March. The fall of this core (also called core core) inflation has been greater, given that diesel permeates all parts of the economy through transportation.

Be that as it may, the prospects of rising global oil prices should mean that core inflation numbers will show an increase in the coming months. But the core core inflation may not. It remains to be seen whether the two cores will show divergent behaviour and thereby widen differences between the hawks and doves.

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