Costlier food props up inflation, falling input costs create some offset

Consumer price inflation (CPI) climbed up to 4.8% in June, after falling to a 20-month low of 4.3% in May. There are three things that the data released on inflation tells us:

• The pick-up in inflation itself does not come as a surprise because fading high-base benefit was expected to raise the print in June. But the expected upside was accentuated by weather anomalies in addition to seasonal uptick pushing up prices of certain food items
  
• Despite being higher, headline inflation has stayed within the 5% bound. But with monsoon erratic, there is worry on the extent of impact on food inflation this fiscal, particularly on cereals, pulses and vegetables that are already seeing high, or rising, inflation
  
• The non-food component of inflation continues to steadily soften led by falling oil, commodity, raw material, and transportation costs. This is positive because it reduces the need for manufacturers to increase retail prices

We believe monsoon disturbances amid already high inflation rates for certain food items are lending an upside to the inflation outlook. However, for now, we continue to retain our CPI inflation forecast at 5% average for fiscal 2024 (fiscal 2023 was 6.7%). Both, July and August are critical for agriculture. We will have to wait and watch how the rains pan out.

Dealing with inflation caused by supply-side shortages - as it is now - is outside the purview of monetary policy. Here, fiscal policy can play an important role. Interventions such as release of stocks, facilitating imports, restrictions on hoarding can help contain abnormal price spikes in the short term. That said, a transitory rise in food inflation is usually ignored by the Reserve Bank of India (RBI). But a sustained increase can become a concern. We expect RBI to keep rates and stance unchanged in the forthcoming policy. Rate cuts are expected early next year.

Key data points in June

• CPI inflation rose to 4.8% in June from 4.3% in May. On a seasonally adjusted basis, headline inflation rose 0.8% month-on-month in June, compared with a smaller 0.2% rise in May
  
• Food inflation jumped to 4.5% from 3%, driven by cereals, milk, spices, pulses, edible oils, and vegetables. The sequential on-month uptick even on a seasonally adjusted basis was 1.5%
  
• Fuel¹ inflation slowed to 3.9% from 4.7% aided by falling global prices and a high base from last year
• Core CPI² inflation was only mildly lower at 5.1% from 5.2% in May
  

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