India’s headline inflation and core rate accelerate in November, CPI rate likely to remain elevated

India’s headline inflation accelerated in the month of November. The consumer price index rose to 4.88 percent year-on-year, coming above market expectations of a rise to 4.28 percent. The rise in headline inflation was mainly due to three factors: increased vegetable and dairy prices, accommodation costs and unfavorable base effects. These three factors are expected to have added 1.04 percent, 0.73 percent and 0.20 percent, respectively to the year-on-year rise in the headline rate, noted ANZ in a research report.

The sharp rise in vegetable prices was driven by unseasonal rains in October that disrupted their supply. Core inflation also accelerated on a year-on-year basis in November. Core rate rose to 4.86 percent from 4.54 percent in the earlier month, driven by increased accommodation costs. Other components of core rate also rose, implying that the effect of GST on prices has yet to wane. The more recent reduction in GST rates for many goods and services might mitigate upside pressure on inflation in the months ahead.

The rise in core inflation is believed to be driven by policy factors rather than demand-side pressures. This view also corroborates with the RBI’s consumer confidence index that dropped to a four-year low of 91.1 in November 2017 from October’s 95.5.

“We now anticipate December headline CPI to remain elevated at around 4.6 percent y/y, even as housing (accommodation) inflation is set to peak during the month. It is also likely that inflation will remain above 4 percent y/y until February 2018”, added ANZ.

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