The finance minister in her Budget speech highlighted that core inflation in India has declined to 3.1 percent, but economists highlight that falling core may not be such a good thing for the economy.

India’s services inflation declined 2.67 percent in June—its lowest level since 2011— widening the gap with goods inflation, according to a Moneycontrol analysis.

The gap between goods and services inflation in June was the highest in eleven months, with goods inflation rising to 6.7 percent in June from 6.3 percent in the previous month.

Experts indicate that falling services inflation may be a sign of weakening demand in the economy.

“The decline in services inflation does indicate that there is a slack in the economy. Demand issues are bringing down services inflation,” said Paras Jasrai, senior analyst, India Ratings and Research.

A Moneycontrol analysis of 299 items in the consumer price index shows that services like barber and beautician experienced lowest inflation in the first quarter of FY24 in the post-pandemic period.

Barber and beautician service inflation was 4.1 percent in June compared with 6.4 percent during similar period in 2023.

“Private consumption has grown merely 4 percent compounded annual growth rate in the last five years, much lower than the headline GDP growth, implying demand slack, which is feeding into core non-goods inflation as well,” said Madhavi Arora, chief economist, Emkay Global Financial Services.

Core goods are also experiencing softer trends.

"The goods inflation in the core-CPI basket have clearly seen softer trends and could continue as input costs ease and comfort to raise output prices is lower amid demand concerns," said Achala Jethmalani, economist, RBL Bank.

Experts indicate that rising interest rates also have a role to play in easing prices.

“RBI policy has been having its lagged impact on overall demand. Demand compression in different segments is getting reflected,” Jasrai added.

They also note that the situation is unlikely to change if the Reserve Bank of India does not move on rates.

“If monetary policy does not relax soon enough, now that it has managed non-food inflation, there will be a high risk of prolonged demand slowdown,” said Debopam Chaudhuri, chief economist, Piramal Group.

“With rising climate volatility, innovative public policies are required to safeguard farm income while maintaining food inflation at reasonable levels,” Chaudhuri added.

The Reserve Bank of India is likely to hold the policy rate at 6.5 percent for the fifth consecutive time at its meeting in August.