Inflation: Is it headed for a 'new normal' that's lower?

Inflationary pressures have eased significantly lately, and evidently more than what economists, markets and even the Reserve Bank of India (RBI) were expecting.

- Manoranjan Pattnayak & Rupali Sarkar

The question is whether this easing is a one-off driven by tailwinds or a signal of something deeper and sustainable. The answer lies in what economists call cyclical and structural factors.

At an eight-year low in July and the first sub-2% reading in more than six years, headline consumer price index (CPI)-based inflation is now even below the lower threshold of RBI's target inflation band.

Notably, looking beyond the headline numbers, there are several more reasons to cheer. The easing of price pressures in recent months has largely been broad-based. While much of the decline in headline inflation is attributed to a sharp dip in food prices, the upside in other major CPI sub-indices has remained capped too. Fuel inflation, albeit with a marginal uptick, is hovering below 3% and transport and communication inflation is easing thanks to moderate international crude oil prices.

Further, core inflation (CPI excluding food and fuel) has remained sticky at about 4%, reflecting a comforting lid on demand-side price pressures even in an environment of monetary accommodation, with 100 basis points of repo rate cuts having been delivered this year. Offering a clear sign of confidence, household inflation expectations, which remained in double-digits through mid-2020 to 2023, have also been on a downtrend in recent months.