September 12, 2016 07:00 CDT

Consensus Actual Previous
Change Y/Y 5.50% 5.05% 6.07%

CPI inflation decelerated in August. At 5.05 percent, last month's print was down more than a full percentage point versus its July outturn and significantly weaker than expected.

What was the first decline and the lowest rate since March mainly reflected a better behaved urban sector and prices here were up 4.22 percent on the year after a 5.39 percent annual rise last time. The rural rate fell a more modest 0.79 percentage points to 5.87 percent.

Leading the headline fall were food prices where the rate slid from 8.35 percent at the start of the quarter to 6.32 percent. Elsewhere, clothing and footwear weighed in at 5.21 percent, housing at 5.29 percent and fuel and light at 2.49 percent. The rate for miscellaneous items was 4.18 percent.

August's fall in inflation should go down very well at the RBI and certainly improves the chances of a cut in official interest rates before year-end. Surprisingly weak July industrial production (see today's calendar entry) is consistent with this view. Even so, the rate is still towards the upper end of its new 2-6 percent target range so the central bank's October meeting may be a little too soon. The risk that new central bank governor, Urjit Patel, might want to establish some early credibility in financial markets further complicates matters.

The Consumer Price Index (CPI) is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Within the overall CPI basket, food (47 percent) has easily the largest weight of any of the major components and a separate consumer foods price index is also released. Monthly and annual changes in the CPI provide widely used measures of inflation and the latter is the policy target of the Reserve Bank of India (RBI).

CPI numbers are widely used as a macroeconomic indicator of inflation, as a tool by governments and central banks for inflation targeting and for monitoring price stability, and as deflators in the national accounts. CPI is also used for indexing dearness allowance to employees for increase in prices. CPI is therefore considered as one of the most important economic indicators.

CPI numbers presently compiled and released at national level for India reflect the fluctuations in retail prices pertaining to specific segments of population in the country -- industrial workers, agricultural labourers and rural labourers. These indexes do not encompass all the segments of the population in the country and as such do not reflect true picture of the price behavior in the country. To overcome the above, the Central Statistics Office (CSO) of the Ministry of Statistics and Programme Implementation has started compiling new series of CPI for the entire urban population or CPI (Urban) and CPI for the entire rural population or CPI (Rural), which reflect the changes in the price levels of various goods and services consumed by the urban and rural population.