E-Paper
August retail inflation 6.83% as veg prices ease, cereals up
The moderation in retail inflation in August was primarily driven by a (relative) easing of vegetable prices, with vegetable inflation falling from 37% to 26.1%
India’s benchmark inflation rate, as measured by the Consumer Price Index (CPI), fell from its July print of 7.4% to 6.8% in August, on the back of a moderation in vegetable prices, although obstinate cereal inflation continues to pose a problem and food inflation (at 9.9%) still remains high.
To be sure, a 5.7% growth in the Index of Industrial Production (IIP) in July and robust Purchasing Managers’ Index (PMI) numbers still paint a good picture on the growth front. While August inflation has positively surprised analysts – a Bloomberg forecast of economists had said it would be 7.1% – it is still outside the Reserve Bank of India’s (RBI) tolerance band of 2%-6%, and well off its target of 4%. The latest number also means that inflation in the quarter ending September could end up higher than the 6.2% projection by RBI’s Monetary Policy Committee (MPC) in its August meeting – a data point that confirms what last month’s inflation print suggested, that there might be no rate cut in the offing before the next general election.
Given the fact that current inflationary tailwinds have their origins in food markets, this also raises a question of whether El Nino’s impact – monsoon rainfall up to September 12 was 8.6% less than its long period average – on the monsoon will put an end to the goldilocks (high growth, low inflation) scenario the Indian economy was basking in until a few months ago. Experts believe that the government will get inflation under control, but worry that efforts to control food inflation might inflict a collateral damage to farmers’ incomes which, in context of weakening export demand, will generate economic headwinds as well as some political discontent in the run-up to the 2024 elections.
The moderation in retail inflation in August was primarily driven by a (relative) easing of vegetable prices, with vegetable inflation falling from 37% to 26.1%. What is worrying, however, is the fact that prices continue to increase at a high pace for other important food items such as cereals, pulses and milk products with their respective August inflation numbers being 11.8%, 13% and 7.7%. Food inflation, as a whole, was still at 9.9% in August. What could add to the problem going forward is the fact that a contraction in edible oil category could reverse itself from October onwards with the dissipation of a favourable base effect.
To be sure, inflation numbers from September onwards could gain from the ₹200/400 subsidy on LPG cylinders which was announced by the government for normal/Pradhan Mantri Ujjwala Yojna consumers on August 29 and does not reflect in the August CPI numbers. Analysts expect the move to lead to up to 30 basis point – one basis point is one hundredth of a percentage point – fall in the headline inflation number. However, the recent spike in crude prices, if it continues could neutralise these gains.
“We expect headline consumer inflation to move down in September as vegetables, particularly tomatoes, have seen a sharp correction. That said, cereals and pulses remain a worry as monsoon continues to be deficient and sowing in pulses has been 8.6% below last year’s levels. The recent spike in crude prices, if sustained, can create upside to fuel inflation which currently is at a benign 4.3%”, Dharmakirti Joshi, chief economist, CRISIL Limited, said in a note.
The July and August inflation numbers of 7.4% and 6.8% almost make it a given that CPI number for the September quarter will overshoot MPC’s August projection of 6.2%. Given the fact that MPC projected an inflation print of just 5.2% in its June meeting, it shows how quickly the inflation story has changed. While the latest inflation numbers are likely to increase the pressure on MPC to harden its rhetoric on inflation, it will help MPC that core inflation – this measures the non-food, non-fuel part of the CPI basket – has eased for the eight consecutive month in August and now stands at 4.85%, the lowest it has been since May 2020.
In another set of numbers, the Index of Industrial Production (IIP) regained momentum to grow at 5.7% in July after a 3.8% growth in June. Manufacturing, which accounts for 77% of the IIP index, grew at 4.6% in July compared to 3.1% in June. A use-based classification of IIP shows that infrastructure/construction goods continued to be a major driver of growth with a growth of 11.4%, making it the fourth consecutive month of double-digit growth. Consumer goods recovered from a 2.6% contraction in June to grow at 3.3% in July, but it is more a reflection of a favourable base effect given a 0.8% contraction in July 2023.
“Purchasing Managers Index (PMI) for manufacturing at a 3-month high of 58.6 in August, points towards improved prospects for IIP growth. We believe that the strength of industrial production in the coming months will be tested by the external environment as the global slowdown is expected to intensify in the second half of the year. India’s merchandise exports have been contracting for last six months and will remain weak in the rest of the fiscal. This will spill over to the manufacturing sectors that cater to export demand. Domestic demand will, therefore, remain the key driver of industrial performance in rest of the fiscal”, Joshi added in his note.
“Inflation prints will likely to come down further in September to around 6% as vegetable prices moderate further (down 22% m-o-m nsa). We think as long as RBI sees food price pressures arising from just a few items (for instance, tomatoes), it is likely to rely on liquidity management as its first line of defence. Since vegetable prices generally normalise in about two months, and oilseeds and pulses can be imported, we do not see RBI using rate action to control the spill-over from these items,” said Aayushi Chaudhary, Pranjul Bhandari and Priya Mehrishi, economists at HSBC Research in a note.
“However, we also believe that if price pressures around cereal inflation begin to pick up further, then the RBI may be forced to use rate action. Cereals make up 9.7% of the inflation basket and cereal price shocks are far more persistent than other food items, staying in the system for six months or more, and even spilling over into core prices,” they added.
