Retail Inflation At 16-Month High In Oct; Breaches RBI's Target Of 4%

India's retail inflation surged to its 16-month high for the month of October. As per data released by the Ministry of Statistics and Programme Implementation on Wednesday, the Consumer Price Index (rural and urban combined) for the last month was at 4.62 percent when compared to 3.99 percent in September and 3.38 percent in October 2018.

The 4 percent-mark was last breached in August 2018.

Rural CPI was 4.29 percent, whereas inflation in the urban area was seen at a much higher level of 5.11 percent in October. In the same month of the previous year, rural and urban CPI were at 2.82 percent and 4.04 percent, respectively.

The rise in inflation was mainly on account on an increase in food prices due higher than normal rainfall this monsoon that delayed harvest and even destroyed crops. Inflation in the "Food and beverages" category was at 6.93 percent in October, with prices of vegetables and pulses rising the most within the category.

However, core inflation fell to 3.44 percent, the lowest in the current inflation series, when compared to 4.02 percent last month.

Core inflation is an indication of demand for goods and the results go to show that the rise in food prices was on account of a shortage in supply rather than an increase in demand. Falling demand reflect weakens in economic conditions.

In fact, most economists surveyed by Bloomberg believe that the jump in inflation is temporary and average CPI for the financial year 2019-20 is likely to stay below RBI's medium-term target of 4 (+ or -2) percent.

Unlikely to affect RBI's Monetary Policy Decisions

The Reserve Bank of India takes into consideration the inflation for its monetary policy stance, it is unlikely that this temporary rise will affect the upcoming meeting in December and halt its interest rate cuts.

Apart from core inflation, other macro-economic data released this month have indicated slowing economic growth. PMI (Purchasing Managers Index) showed weak manufacturing and service activity in October and which September's IIP (Index of Industrial Production) data released this week showed a contraction to 4.3 percent, the lowest in almost 8 years.

Further, on Tuesday, an SBI report said that GDP (gross domestic product) for Q2 may be at 4.2 percent, lower than the 6-year low of 5 percent growth seen in Q1.

While all signs point to a slowing economy, the RBI is likely to cut interest rates further in December.