What Does 6.01% Inflation Mean for RBI Policy

When the US inflation for Jan-22 came in at a 40-year high of 7.5%, the inflation in India was expected to be close to the 6% mark. If Dec-21 CPI inflation at 5.59% was 58 bps higher than Nov-21; then Jan-22 CPI inflation spiked by another 42 bps to 6.01%. The inflation number for Jan-22 is above the RBI tolerance limit of 6%. To an extent, the low base effect of Jan-21 at 4.06% inflation also resulted in higher YoY inflation in Jan-22.

In Jan-22, CPI inflation was above the 6% mark after a gap of 7 months. However, what is more noteworthy is that this is the 28th month that retail inflation stayed above the RBI median target of 4%. Remember, the RBI median inflation target is 4% and the worst case range is 2% on the lower side and 6% on the upper side. Like in December 2021, the pressure on prices has once again come from food prices in the month of Jan-22 also.

India should be really worry about core inflation at 6.21%

Core inflation, by definition, is also called residual inflation. It excludes cyclical items of the inflation basket like food and fuel and therefore any inflation control plan must necessarily begin with controlling core inflation. That is because core inflation is a lot stickier compared to food and fuel, which are more cyclical in nature.

Core inflation for Jan-22 stood at a level of 6.21%, marking the fourth successive month when core inflation has been above 6%. Also, in seven out of the last twelve months, the core inflation has been above the 6% mark. The reason core inflation is so material is that it is triggered more by supply side constraints which take time to rectify.

Ironically, while oil is excluded from the definition of core inflation, the downstream impact of oil on other products ensures that oil indirectly impacts core inflation too. Look at the table below which captures month-wise data for food inflation and core inflation over the last 1  year.