High-base effect saves the blushes

Consumer inflation eased dramatically to 3.5% on-year in July — dipping below the Reserve Bank of India’s (RBI) medium-term target of 4% for the first time since August 2019 — largely due to statistical high-base effect.

Interestingly, while the high-base effect was supportive for food inflation, it had an adverse bearing on core inflation.

Food inflation plunged to 5.4% from 9.4%, as the high base offset the sequential rise in prices. Vegetables inflation saw the biggest drop to 6.8% from 29.3%.

The big worry now is food prices continue to be elevated with the on-month rise being slightly higher than usual for July.

At the same time, core inflation rose for the first time in over a year to 3.3%.

The good part is monsoon and sowing have been progressing better than last year and the expectation is that the arrival of fresh supplies in the market should curb prices over the next few months. As of August 12, rains were at 6% above their long period average.

Core prices are facing upward pressure from rising geopolitical uncertainties, higher input costs and the dial-up in telecom tariffs. That said, only a mild increase is expected this fiscal.

Overall, though, we expect inflation to ease and average 4.5% this fiscal mostly owing to softer food prices. This should allow the RBI to begin cutting rates earliest by October.

Key data points in July

• CPI inflation slid to 3.5% from 5.1%
• Food inflation eased sharply to 5.4% from 9.4%
• Fuel¹ prices fell 5.5% on-year
• Core CPI² inflation rose 20 bps to 3.3%, up for the first time since January 2023

¹ Refers to CPI fuel and light
² CPI excluding food and beverages, and fuel and light