Retail inflation dodges pressure from food, traces softening in fuel and core

Consumer price index (CPI) inflation eased marginally to 4.8% in April from 4.9% in March. Food inflation, however, edged up to 8.7% from 8.5%, driven by costlier cereals and meat; vegetables, which have been sticky at elevated levels, softened a touch. Prices of edible oils fell at a softer pace on-year.

Despite the uptick in food, non-food components helped curtail headline inflation. Fuel prices deflated at a faster pace while core inflation eased to a record low of 3.2%.

Food inflation, which has a 39.1% weight in the CPI gauge, has remained well above 8% for six months now. Pressure on food prices continues, with the ongoing heatwaves being one factor.

Our base case is the upcoming monsoon rains can offer respite, assuming they are they are well distributed in terms of time and geography.

Fuel and light, with a 6.8% weight, has been reducing the pressure on the headline for eight months, led by the government’s retail fuel price relaxations. But if crude oil prices surge and stay elevated in the wake of geopolitical concerns, inflation could trend upwards again.

Meanwhile, core inflation, with a weight of 47.3%, has been low for most of this period. However, the expected rise in commodity prices with a low base effect can put upward pressure on core inflation in the current fiscal.

Net-net, we expect CPI inflation to broadly ease to 4.5% on-year this fiscal from 5.4%. Softer headline inflation forecast is primarily premised on lower food inflation assuming a normal monsoon and on the back of the high base of fiscal 2024.