If it had not been for perishable food price cycle which seems to have reversed of late, month-on-month inflation would have stayed flat. Food inflation was almost entirely responsible for the 0.76 percent month-on-month change in inflation numbers for May 2015. More than three-fourth of the month-on-month CPI increase was caused by perishable food items.

Yet, the respite in oil prices continues to keep the overall inflation well in control as the year-on-year CPI clocked in at 3.16 percent. All else constant, inflation is likely to be subdued as international oil markets are expected to remain weak as global inventories pile up and production increases. The high base effect is likely to continue for some time as oil prices had started to dip only around November last year.

Perishable food prices have usually been volatile and should not be a great cause of worry. The pre-Ramadan factor also seems to be in play as regards perishable food prices. Expect the perishable food items to remain volatile and towards the upper trajectory for June as well.

The yearly average inflation number though has further come down to 4.65 percent. No surprise, that the discount rates at 7 percent reflect the scenario, when compared to 8.66 percent average CPI for the same period last year.

The million dollar question is how low is too low for inflation. There seems to be no definitive answer for that. If the budget signals continuation of stabilization measures, it could well mean further rationalization of energy prices through cut in subsidies. The imposition of GIDC is sure to jack up the gas prices, and the base tariff is also set to be revised upwards from the next financial year. Keep in mind, the high base effect would not let the CPI numbers go up drastically all of a sudden, but if energy prices are rationalized, as highly probable, it sure will have a substantial impact on CPI for the latter half of FY16.

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January- 2015 CPI - Key items


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                                             YoY (%)     MoM (%)


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General                                       3.88          0.08


Food & bev                                    2.13         -0.50


Non-persishable                               2.06         -0.05


Perishable                                    2.64         -3.37


Clothing & footwear                           8.09          0.21


"Housing, water, electricty, gas & fuels"     5.74          1.42


Transport                                    -8.10         -2.13


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