Indian headline inflation weaker than expectations in October on decline in food prices

Indian headline inflation came in weaker than expected in October. The consumer price inflation came in at 3.31 percent year-on-year in the month, slowing down from 3.70 percent. The year-on-year print was driven by another fall in food prices. On a sequential basis, headline inflation rose 0.29 percent in October, compared with a 0.14 percent fall in September. Headline inflation has now undershot consensus estimates for the sixth consecutive month.

The weaker than anticipated inflation print was mainly because of subdued food prices, which dropped 0.36 percent sequentially in October. There has been a continued slowdown in food prices, especially in rural areas where the pass-through effect of minimum support prices was presumably negligible. The MSP-related components of the consumer price inflation dropped 1 percent sequentially in October.

On the contrary, core inflation accelerated to 6.19 percent year-on-year in October, after easing during the past two months. The sequential rise in core inflation came in at 0.83 percent sequentially in October, from 0.50 percent sequentially in September.

Among the major components of core inflation, healthcare costs and the prices of household goods and services rose in the month. In particular, healthcare costs rose 2.38 percent sequentially – the most rapid rate since January 2011. Stripping healthcare costs, core rate was up 5.95 percent year-on-year in October.

“Based on the successive downside surprises to CPI, our inflation forecast of 4.6 percent for FY19 faces downside risks. Looking ahead, there has been a significant shift in one of the key risks to inflation, ie Brent crude prices which are trading closer to USD 70 per barrel”, said ANZ in a research report.

Both these factors should permit the RBI to abstain from further rate hikes in 2018.