CEA: Spike in retail inflation transitory

New Delhi: Chief Economic Advisor K Subramanian said spike in retail inflation is transitory, attributing it largely to price rise in onions, and expects it to moderate by July. He asserted that there were green shoots of growth.
“Increase in headline inflation is a transitory phenomenon," Subramanian said while highlighting the contribution of rise in prices of food items like onions.

Consumer Price Index (CPI) retail inflation rose to 68-month high of 7.59% in January up from 7.35% in December. Core inflation, which excludes volatile food and fuel items, was 4.1%.

“If you take the difference between headline and core inflation, headline is 7.6% and core 4.2%....the difference is 3.4%...Of that, 2.45%, which is actually 72% (of the 3.4%), is contributed just by onions,” chief economic advisor said adding that with a fresh crop coming in March moderation in onion prices is expected.

He said even within the food basket there was a huge base effect as food inflation was -2.2% in January 2019.

“Headline inflation basically tends to converge with core within the space of 12 months. So about July- August, we expect full convergence to happen, that’s a 12 month period. So, that’s why I expect July 2020 for it to moderate,” Subramanian said. “Inflation increase in headline is therefore a transitory phenomenon.” He said his view was consistent with the monetary policy statement of the Reserve Bank of India that food inflation is likely to soften from the high levels of December with arrival of new harvest and high vegetables production.

GREEN SHOOTS VISIBLE

The Chief Economic Advisor said there were green shoots visible and one needed to look at the co-relation between PMI data and Index of Industrial Production (IIP) and GDP. “I don't want to start, you know, start shouting victory or anything....there are some green shoots definitely," he said adding that the outlook given by Standard &Poor is also consistent with this.

IHS Markit India Manufacturing Purchasing Managers' Index jumped to 55.3 in January from 52.7 in December, its highest reading since February 2012. However, data released on Wednesday showed factory output contracted in December by 0.3% after showing a growth of 1.8% in November.