Core price pressures are building

Some have argued that the recent jump in inflation is all about a surge in volatile food prices, with the implication that it shouldn’t have a significant bearing on monetary policy. But this ignores the fact that underlying price pressures are rising too. Core consumer price inflation rose to 4.6% y/y in August, from 4.1% a month earlier. On our estimate, core wholesale price inflation also jumped last month, to its highest since October 2014. With capacity utilisation tightening and fiscal policy set to be loosened at state level, core price pressures look set to continue rising. We therefore think that the RBI will refrain from loosening policy any further.