CPI inflation steady at 3.2% in August 2019

Analysts see room for rate cut as IIP, inflation numbers disappoint

Overall consumer prices slowed in August, reflecting a big drop in the cost of gasoline and other energy products. It was enough to push core inflation over the past 12 months up by 2.4%, the largest 12-month increase since July 2018.

Data released by the CSO showed that inflation rate for the food basket rose further to 2.99 per cent in August from 2.36 per cent in July.

Highest inflation data was witnessed in Assam at 5.79 per cent and lowest -0.42 in Chandigarh. It has projected retain inflation at 3.1 per cent in second quarter and 3.5-3.7 per cent in the second half of the ongoing financial year.

Commenting on the inflation data, Icra's principal economist Aditi Nayar said with the CPI recording only a mild increase in August 2019 despite the sharp uptick in the food inflation, "we continue to expect the RBI's Monetary Policy Committee (MPC) to reduce the repo rate by 15-25 bps in the October 2019 policy review, given the continuing concerns related to economic growth".

On a year-over-year basis, headline inflation is now at 1.7%, in-line with consensus and 1.8% previously.

Markets are now fully pricing in a 25bps rate cut for next week's two-day FOMC policy meeting (17-18 September) as the core PCE inflation rate remained unchanged comfortably under the Fed's 2.0% target and the ISM business survey found the manufacturing sector in contraction during the month of August.

While the resumption of trade talks has eliminated the odds for a 50bps rate cut in September according to Fed funds futures and shifted demand slightly away from safe-haven assets, a large miss in the upcoming data could bring the case back on the table. Hospital inpatient care prices increased 0.4% and the cost of doctor visits shot up 0.5%, reversing July's 0.5% decrease. The Fed lowered borrowing costs in July for the first time since 2008. It is the lowest level in almost five months and further evidence that the labor market remains strong. Economists polled by Reuters had forecast the PPI would be unchanged in August and rise 1.7% on a year-on-year basis.

The figure stood at 3.69 percent in August previous year.

Clothing costs, which had posted a big jump in June, edged up a small 0.2% in August.

Apparel prices rose 0.2 per cent after gaining 0.4 per cent in the prior month. Prices for new motor vehicles dipped 0.1 per cent. Prices for recreation increased 0.5 per cent, the most since December 2018.

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