Price pressures returned to the Indian economy in August, with retail inflation quickening to 7% after cooling to a five-month low in July. The increase, led by food prices, makes it the eighth month that retail inflation has stayed above the central bank’s upper tolerance limit of 6%, strengthening the case for continued monetary tightening.
Inflation So For:
Retail inflation in July had cooled to 6.7%, and a poll of 22 economists estimated August inflation at 6.9%. The Reserve Bank of India has projected Consumer Price Index (CPI) based inflation for 2022-23 at 6.7%. Inflation is expected to remain elevated over the next couple of months due to last year’s low base, even as easing energy and commodity prices globally would help cool inflationary pressures. RBI’s monetary policy committee (MPC) raised the repo rate by 50 basis points for the third time in a row in August, taking the policy rate to pre-pandemic levels of 5.4%. The MPC meets again from 28 to 30 September.
What The Economists Said:
“Inflation is now broad-based, with all segments registering inflation above 6%. This high inflation will work in favour of more aggression from the RBI in terms of hiking the repo rate. The base effect will tend to keep inflation elevated for the next three months for sure, with added pressure from food products in case of deficit in production,” said Madan Sabnavis, chief economist, Bank of Baroda.
“Notwithstanding the undershooting in the GDP growth relative to the MPC’s projections for Q1 FY23, and the expectation of a slightly lower-than-projected CPI inflation print for Q2, we now foresee a higher likelihood that the MPC will stick to the new normal rate hike of 50 bps in its September meeting, with the headline inflation having reversed to 7% in August,” said Aditi Nayar, chief economist, ICRA. “The kharif acreage is increasingly unlikely to reach last year’s level, even as the healthy reservoir levels augur well for timely rabi sowing. Besides, we remain watchful of the sequential uptick in the inflation for services, given the healthy recovery in demand for the segment,” Nayar added.
Causes For This Rise:
The uptick in CPI inflation was led by food inflation, which spiked to 7.57% in August from 6.71% in July. The food and beverages category makes up 54% of CPI.The consumer food price index, which includes both manufactured and non-manufactured food articles, rose to 7.62% in August from 6.69% in July. Inflation in the case of vegetables accelerated to 13.23% from 10.9% in July. However, edible oil inflation moderated to 4.62% in August from 7.52% in July. The rate of price rise in fruits rose to 7.39% in August from 6.41% in the previous month.
What The Govt Said:
Union finance minister Nirmala Sitharaman at a recent address on ‘taming inflation’, said that it could not be left to monetary policy alone, but fiscal policy needs to work alongside. The ministry of finance, meanwhile, attributed the “moderate increase” in CPI inflation to an adverse base effect and an increase in food and fuel prices—“the transient components of CPI inflation”.
“Core inflation calculated by excluding the transient component of CPI such as “food and beverages” and “fuel and light” was recorded at 5.9% in August, remaining below the tolerance limit of 6% for the fourth month,” the ministry said in a statement, adding that the prices of major inputs like iron ore and steel have sobered in the global markets. “This coupled with the measures taken by the government to rationalize tariff structures of inputs to augment domestic supply has helped to keep cost push inflation in consumer items under control,” it said.