Assessing if persistence on core-inflation can be broken from a goods versus services prism.
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Despite 250 bps of rate hikes, if RBI still sounds concerned of the elevated and persistent levels of Core CPI inflation in the economy – it rightly does. After all, rate hikes are expected to have the strongest bearing on demand side of inflation captured best by Core inflation, compared to food and fuel (i.e., non-core) inflation which are largely supply-side, volatile and exogeneous in nature. We assess if persistence on core-inflation can be broken from a goods versus services prism. Core-core Goods inflation having eased from a peak of 8.4% in Aug-22 to 7.9% as of Feb-23, continues to remain much above Core and Core-core inflation, both. While we expect disinflation in Core-core goods to quicken in FY24, several other factors could impart a downward rigidity to this process such as continuing recovery of contact-intensive services, strong persistence of core-core goods inflation, higher demand for urban rented dwellings and a moderate turnaround in rural demand.