Inflation Falls Back To 0% In August

As regards CPI inflation, a slower rate of price rise in fruit and vegetables and protein items, except for pulses, pulled the inflation to a new low of 3.66 % in August, as against 3.69 % in July.

Inflation slipped back to zero last month as petrol price falls and muted rises for new fashion ranges kept a lid on the cost of living.

Chief Economic Advisor Arvind Subramanian said the key point in the data is that the core momentum has decelerated over the last three months “so that’s also an encouraging sign of abetting inflationary pressures”.

Overall, the food basket inflation remained in negative territory for second month in a row at (-)1.13 per cent. For vegetables, it declined to (-)21.21 per cent, helped by potato at (-)51.71 per cent.

Last month’s 12-month inflation rate compared with 0.1 percent in July, dragged lower also by falling fuel and food prices, the Office for National Statistics (ONS) said in a statement.

As a result, the pound strengthened against the dollar after the data, as some traders wagered it left the door open for the Bank of England to start raising interest rates after more than six years at a record low of 0.5%. That flirtation with negative inflation was only brief, and prices were rising again in May, albeit by just 0.1% on the year.

Wholesale prices fell 4.95 percent in August from a year earlier after slipping 4.05 percent in July, the Commerce Ministry said in a statement on Monday.

“If there is a (US) hike, then market reaction will need to be monitored”, said A. Prasanna, an economist with ICICI Securities Primary Dealership Ltd. “I still expect markets to calm down by the time of RBI policy date”.

“We expect CPI inflation to pick up close to 1 per cent by January 2016 which should reduce concerns among MPC members”. The data also comes two weeks before the Reserve Bank of India’s scheduled policy review meeting on September 29, where it will decide on whether to cut interest rates.

“How earnings develop over the coming months will play a crucial role in just when the Bank of England starts to raise interest rates”, said Howard Archer, economist at the consultancy IHS Global Insight. The smaller rise this year follows a sales period in which prices fell by less than a year ago.

But Rajan is concerned about a renewed rise in inflation in a country where food and other price hikes cause huge hardship for tens of millions of poor.