'Core inflation may bottom out around 4%'

Core inflation, which excludes volatile food and energy prices, may stabilise around 4% in January with a limited scope for further decline as prices continue to be sticky in certain service sectors, according to economists. A higher core is likely to keep retail inflation from declining significantly, they say.

Core inflation eased to 4.3% in October, according to official data. "Core inflation internals remain favourable with decline led by services inflation that is typically less volatile. But the scope for a meaningful and sustained fall in core may be limited unless growth softens materially," said Abhishek Upadhyay, senior vice president and economist, ICICI Securities PD.

An ET analysis shows that services inflation reached its lowest level since 2016 of 3.6% in October, from 3.8% the previous month. But some services still exhibit over 5% inflation, which economists say is unlikely to come down.


"Education and health are very sticky items, and their inflation is hovering around 5-5.5% because of inelastic demand," said Paras Jasrai, senior analyst, India Ratings and Research, pointing out that core is unlikely to dip below 4%.

Education inflation in October was 5.1%, whereas health inflation was 5.9%. Personal care and effects inflation was at a high of 7.8%.

India's retail inflation eased to 4.87% in October, the lowest in four months, from 5.02% in September.

Goldman Sachs, in its latest report, pegged the core inflation rate for FY25 at 4.6%, unchanged from this fiscal, and forecast headline inflation to stay elevated at 4.9% in FY25 versus 5.6% this fiscal.

Madan Sabnavis, chief economist, Bank of Baroda, points out that the core inflation number is likely to be driven by base effect and can drop to 4% in January.

"At the margin, there is a little more downside to core inflation... It is likely to move back closer to 5% by the end of next year and average around 4.5% for FY25," said Rahul Bajoria, MD and head of EM Asia (ex-China) economics, Barclays.