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Look what is driving core inflation in India

With CPI falling to 2.19 per cent in December 2018, a way below than the RBI's target of 4 per cent, there are some hopes of an interest rate cut.

twitter-logoAnand Adhikari | January 24, 2019 | Updated 18:13 IST
Look what is driving core inflation in India

The headline inflation in India is moving southwards, thanks to downward spiral in food prices and some bit of respite in fuel costs. In fact, food has almost half the share in the CPI or retail inflation basket. There is now a clamour for reducing interest rates. The repo rate, the rate at which banks borrow short term funds from the Reserve Bank of India (RBI), is currently at 6.50 per cent. The repo rate actually fell to 6 per cent in April 2017, but had to be raised twice by 25 basis points each in June and August last year because of inflationary pressure. With CPI falling to 2.19 per cent in December last year, which is way below the RBI's target of 4 per cent, there are some hopes of an interest rate cut. In fact, CPI has been below 4 per cent from July last year.

But there is a worrying factor especially if one looks at the 'core inflation', which excludes food and fuel. The food and fuel are highly volatile and don't represent the true picture of inflation. The core inflation has been actually at over 4 per cent in the last 5 years. Early last year, the core inflation was at 5.1 per cent and ended the year with 5.9 per cent. So what is keeping the core inflation at an elevated level?

  • The key components of core inflation are housing, education, household goods and services, transport & communication, recreational and amusement and personal care etc. In most of these items, the price pressure remains, this makes the core inflation sticky.
  • The biggest price escalation is seen in the education vertical. While the tuition and other school fees haven't shown a big jump, the private tutor and coaching fees have gone up in a big way.
  • The household goods and services prices are also up. The price rise has been seen on air conditioners and air coolers, electric iron heaters, stainless steel utensils, bathroom & sanitary equipments, chairs, stools, bench and tables.
  • The transport and communication services cost is also up. Air fares especially economy class fares are up. Railway fares haven't seen much raise but bus, tram, auto and taxi fares are up.
  • Some of the other items that have seen price escalation are medicine, hospital and nursing home, domestic servant and cook, watchman and water charges.

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