Mint Quick Edit | Inflation: Below target, above the worry line

6 months ago 11

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An inflation undershoot could be a worry if it’s a signal of weak demand and threatens to slip into deflation.

Summary

July’s reading was just 1.55%, having slid below RBI’s 2-6% target band. But it’s probably a blip, not a sign of weak demand or deflation risk. As we look ahead, policy needs to ensure that price stability endures.

In the usual course of daily life, an inflation number does not need to be repeated for people to check if they heard it right. Tuesday’s data release by the government that put India’s cost-of-living just 1.55% higher in July than in the same month last year, however, is in a class apart.

Also Read: Mint Quick Edit | Low inflation: Stoking high hopes?

The gauge that bears this say-that-again piece of news is the Consumer Price Index, which had shown retail inflation at 2.1% in June. A nine-month long cool-off in prices has led us to the lowest inflation reading in eight years.

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Notably, it has breached the lower bound of the central bank’s 2-6% target range. An inflation undershoot could be a worry if it’s a signal of weak demand and threatens to slip into deflation. But policymakers need not be anxious because the dip is a likely blip, driven significantly by last year’s high statistical base.

Also Read: Mint Quick Edit | Inflation surprise: Aim for predictability

The Reserve Bank of India’s (RBI) forecasts point to mild price acceleration in the quarters ahead. Since monetary policy works with a lag, our current comfort on price stability is not an argument for RBI to soften lending rates further. It is, however, a moment that shouldn’t become the stuff of wistful memory in times to come. Price stability needs to endure.

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