Core Inflation Highest Since Sept 2023 But MPC Might Be Unperturbed—Here's Why
Key drivers remained gold and silver. While inflation in gold was at 36% on an annual basis, silver inflation was at 17.8%.
Core inflation is at the highest since September 2023. Still, it is likely to remain range-bound, while headline inflation continues to ease led by food prices.
India's retail inflation fell further in June, coming in at the lowest since January 2019, led by a fall in prices of several food items. However, while headline inflation fell to 2.1%, from 2.8% in May, core inflation — that excludes volatile food and fuel components — continued to rise, coming in at 4.55% from 4.35% last month, according to data from Bloomberg. This was the highest since September 2023.
This was largely led by personal care and effects which rose by 14.8%, marking the sixth-straight month of double-digit rise. Apart from this, transport and communication inflation came close to the 4% mark, while inflation in education, health and miscellaneous items also remained above the 4% mark.
Economists are not concerned. Key drivers remained gold and silver. While inflation in gold was at 36% on an annual basis, silver inflation was at 17.8%. Sameer Narang, chief economist at ICICI bank, said that core inflation is driven by higher precious metals with core excluding precious metals relatively muted at 3.4% on an annual basis in June. Even as core is ticking higher, weak global and urban demand implies it shouldn’t go up much from here, he said.
Core inflation has been firming up at a gradual pace and is likely to range between 4.2% and 4.8% in the remaining months of FY26 vs the average of 3.8% in FY25, stated a note by QuantEco Research. A moderate upside to core inflation could persist in FY26 on account of a recovery in domestic consumption drivers with support from monsoon, central government’s provision of income tax relief, and recent surge in transfer payments by various states, the note explained. Some adverse pass-through of imported inflation on account of tariff uncertainty led supply chain disruptions cannot be ruled out, it added.
The effective freeze of petrol and diesel prices has helped keep core inflation in check, stated a previous note by Nomura. Inflation across global commodity prices has also been relatively limited. Additionally, India’s imports from China have structurally shifted higher in recent years, which is probably ensuring subdued input costs, along with higher dumping-led competition for domestic players, the note explained.
Is Range-Bound Core Inflation A Sign Of Weak Growth?
Despite the intuitive rationale of higher growth contributing to increased demand-side inflationary pressures, the evidence has been mixed, according to Nomura economists Aurodeep Nandi and Sonal Varma. Excluding the impact of pandemic related disruptions and higher global commodity prices, the positive relationship between core inflation and growth becomes more evident in recent quarters, the economists said. "Notwithstanding the limited number of data points available for this period, weak growth could be a contributing factor to lower core inflation currently."
The consumer food price index, which constitutes 47.25% of the inflation basket, is likely to keep headline inflation too in check. Food prices declined by 1.1% in June, marking the first contraction in the index since February 2019. Expectations of an above-normal south-west monsoons, along with encouraging kharif sowing and reservoir levels, continue to bode well for food inflation.
Although firmness in core inflation and global risks warrant caution, the magnitude of downward revision to headline inflation has created space for incremental monetary accommodation, with economists expecting at least one further rate cut of 25 basis points in 2025.
