Dramatic lift from food inflation amid material comfort from non-food inflation

Consumer Price Index (CPI) based inflation surged to 7.4% in July from 4.9% in June. Though a sharp rise in inflation was expected, its extent came as a surprise. It was led by a 11.5% inflation in food items.

• Though likely to be transient, food price pressures are expected to stay for a couple of months more. July data not only highlights the surge in prices of vegetables (37.3%), but also the double-digit inflation in cereals, pulses (~13% each), spices (21.6%), and high inflation in milk (8.3%) - all of which is pinching the average consumer’s pocket. Monsoons turning normal provide limited comfort to prices in the immediate term
  
• Meanwhile, there is relief on the non-food front, where inflation has been steadily softening, led by falling input cost pressures. This has reduced the need to raise retail prices for several commodities. In July, goods inflation (excluding food) slid 20 basis points (bps) on-month to 5.1%, while services inflation softened 20 bps to 4.5%. Excluding vegetables, CPI inflation was up only 10 bps on-month, at 5.5%, while excluding the entire food category, CPI inflation was down 25 bps, at 4.8%
  
• Yet, for now, the pressure from food prices remains the big worry and can cause the headline inflation to run red hot for another 2-3 months, after which government intervention (releasing food stocks, facilitating imports and restrictions on hoarding) and fresh crop arrivals should provide some relief