November 15, 2016 06:00 CST

Consensus Actual Previous
Change Y/Y 4.2% 4.2% 4.31%

Headline CPI inflation in India fell to 4.20 percent in October from 4.31 percent in September, in line with the consensus forecast. Inflation has now fallen for three consecutive months after peaking at 6.07 percent in July. This moderation in price pressures is consistent with the Reserve Bank of India's assessment that CPI inflation will stay within its target range of 2.0 percent to 6.0 percent over the near-term. In month-on-month terms, the consumer price index rose 0.38 percent in October, after falling by 0.15 percent in September.

Lower food price inflation was again one of the factors driving the headline rate lower in October. From its recent peak of 8.35 percent in July, food price inflation has fallen in each of the last three months, dropping from 3.88 percent in September to 3.32 percent in October, its lowest level since August 2015.

Changes in inflation rates in other categories of consumer spending were mixed but generally small. Inflation fell slightly from 3.07 percent in September to 2.81 percent in October for fuel and electricity, rose from 5.19 percent to 5.24 percent for clothing and footwear, and fell from 5.18 percent to 5.15 percent for housing. Inflation in urban areas fell from 3.64 percent in September to 3.54 percent in October, while inflation in rural areas fell from 5.04 percent to 4.78 percent.

Today's CPI data is broadly in line with wholesale price data released earlier, which has also shown price pressures moderated in the last few months. This will likely reinforce the RBI's confidence that inflation is on track to stay within its target range over coming months and could strengthen the case for further policy easing after officials cut policy rates last month. Other factors, however, are also likely to impact near-term policy decisions, including the potential economic effects of the U.S. presidential election results and the Indian's government decision, announced last week, to withdraw high-denomination banknotes from circulation.

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.