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Retail Inflation on the Decline
Jul 13, 2017

Let's now look at what's happening in the economy...Retail inflation measured by the Consumer Price Index (CPI) dropped to a record low of 1.54% in June. The drop was mainly on the back of a sharp drop in the prices of vegetables and pulses. Does this call out for a rate cut?

Food inflation has dropped from a high of 7.46% in June 2016 to a negative 1.17% in June 2017. The main reason for the fall was a bumper crop that led to an oversupply situation. This in turn has lowered the prices of the farm produce. No wonder farmers are protesting to increase the minimum support prices (MSPs). Rising imports too played a role in the falling food prices.

However, the number the RBI looks at is core inflation. Core inflation excludes food and fuel inflation. The positive sign is that this number too is on a declining trend. Components of core inflation such as health, amusement, education, and transportation have witnessed a consistent fall.

Falling core inflation bodes well for a rate cut in the upcoming monetary policy meeting on 2 August 2017. Subdued factory output data for May could also encourage the RBI to cut rates.

But a 25-basis point rate cut is not a given. The RBI, in its previous monetary policy meeting, raised concerns about the impact GST could have on inflation. It also cited fiscal risks from farm loan waivers. These risks still prevail.

At Equitymaster, we do not attempt to predict how and when macroeconomic developments will unfold. Instead, we focus all our energy on understanding the underlying business strength of companies. In fact, the ValuePro team is always on the lookout for all-weather stocks whose fortunes are not tied to economic cycles.

Data Source: CSO

This Chart Of The Day was published in The 5 Minute WrapUp - What's the Difference Between Direct and Indirect Plays? Answer: 882% Gains

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