Fuel, food prices keep inflation high at 6.26%
Retail inflation as measured by the Consumer Price Index (CPI) grew at 6.26% in June on the back of higher food and fuel prices, the second straight month that India’s benchmark inflation measure has been above the Reserve Bank of India’s upper tolerance level, raising questions whether the country’s central bank will decide to continue with its easy interest rate regime when it meets next in August.
The latest number, released Monday, is lower than the 6.59% forecast by a Bloomberg poll of economists, and also marginally lower than May’s 6.3%.
Oils of all kinds seem to be the at the core of the problem -- inflation in oils and fats was 34.8% in the month, compared to May’s 30.8%, the result of high edible oil prices; and fuel and light inflation (as the head reads) was 12.68% (an all-time high) as compared to 11.6%, on account of spiralling fuel prices.
Experts said the number could force the government to cut some duties on fuel to reduce retail prices.
The National Statistics Office, which released inflation data, also put out factory output metrics for May, as measured by the Index of Industrial Production (IIP). The year-on-year growth of 29.3% in IIP is basically a base-effect driven illusion given the 33.4% contraction in May 2020 caused by last year’s hard lockdown to combat Covid-19. To be sure, May numbers this year too were expected to suffer because of the restrictions during the second wave, although many factories continued to remain open during India’s crippling second wave (unlike last year).
While some high frequency indicators such as the Nomura India Business Resumption Index (NIBRI) suggest a sharp revival in economic activity – NIBRI jumped to 95.7 in the week ending July 11, where 100 captures the per-pandemic levels of activity – other indicators such as Purchasing Managers’ Index (PMI) suggest a loss of momentum in June compared to May. The composite PMI index fell from 48.1 to 43.1 between May and June 2021.
The latest inflation numbers suggest that fuel prices are pushing up prices of other commodities. The moderation in headline inflation number is basically a result of reduction in inflation for pan, tobacco and intoxicants and housing category. Food inflation rose from 5.01% to 5.15% and inflation in clothing and footwear increased from 5.3% to 6.2% . Within food items, which have an overall share of 39% in the CPI basket, the oil and fat category reached yet another record high with an annual inflation number of 34.78%. Prices for cereals and vegetables continued to contract, although prices of the latter seem to be gaining momentum. Pulse prices also posted a double-digit growth in June.
There could be multiple sources of tailwinds to inflation in the month of July. Fuel prices continue to increase. Petrol and diesel prices have increased by ₹2.38 and ₹0.54 per litre in Delhi between June 30 and July 12. Most dairy cooperatives have increased milk prices in the month of July. Inflation for the miscellaneous category of CPI was flat at 7.3% in May and June.
In its June meeting, RBI’s Monetary Policy Committee projected an inflation number of 5.2% in the quarter ending June 2021. At 5.59%, the June inflation numbers have overshot the MPC projections by 39 basis points. The MPC forecast an annual inflation of 5.1% in 2020-21.
“There is need for the government to start lowering taxes (on fuel) or CPI inflation will increase and put pressure on MPC,” said Madan Sabnavis, chief economist, CARE Ratings.
“The current inflation spike appears to be transitory, driven largely by supply side factors and going forward, it is expected to moderate in the third quarter,” RBI governor Shaktikanta Das told Business Standard in an interview on July 8.
But the challenge remains.
“We forecast CPI inflation at 5.4% in FY22. The drivers of inflation will likely change, from logistical disruptions in 1H to cost push and services demand led inflation in 2H. Even as headline inflation falls over the next few months... the headline print is likely to remain higher than the 4% target. We expect the RBI to embark on a gradual normalization path starting 4Q2021,” Pranjul Bhandari, Chief India Economist, HSBC Securities and Capital Markets (India) Private Limited, said.