CPI Inflation Preview: A Brief Respite

Retail inflation is expected to slip lower in May before it sees an uptick over the coming months.

CPI inflation in May is expected to fall to 4.37%, according to a Bloomberg poll of 28 economists. This will be the lowest since September 2021. That will, however, come on a high base.

Consumer inflation cooled to 4.7% in April, falling to the lowest since October 2021. It fell within the central bank's target range for the second straight month, raising the bar for further rate hikes.

Of the 22 items monitored on a daily basis by the Department of Consumer Affairs, less than half continued to see a rise in prices on an annual basis, with fewer still seeing a sequential rise.

The headline inflation trajectory is likely to be shaped by food price dynamics, the Monetary Policy Committee's June resolution said. While the forecast of a normal southwest summer rains augurs well for kharif crops, spatial and temporal distribution of the monsoon would need to be closely monitored to assess the prospects for agricultural production, it stated.

The central bank has lowered it's forecast for retail inflation in the ongoing quarter but its estimate for the fiscal year remains broadly unchanged, indicating that inflation is expected to rise from it's current lows.

CPI inflation is projected at 5.1% for FY24, compared to 5.2% projected in April. The forecast for:

• Q1: 4.6% versus 5.1% previously;

• Q2: 5.2% against 5.4%;

• Q3 and Q4: Retained at 5.4% and 5.2%, respectively.

"Consumer price inflation eased during March-April 2023 and moved into the tolerance band, declining from 6.7% in 2022-23. Headline inflation, however, is still above the target as per the latest data and is expected to remain so according to our projections for 2023-24," RBI Governor Shaktikanta Das said in his statement last week. "Therefore, close and continued vigil on the evolving inflation outlook is absolutely necessary, especially as the monsoon outlook and the impact of El Nino remain uncertain."

According to forecasters, retail inflation is unlikely to fall below 5% for a while, at least after this month.

Headline inflation may touch 4% or go slightly below that for a brief period over the next few months if there are no risks from the monsoon or on the geopolitical front, said Suman Chowdhury, chief economist at Acuité Ratings & Research. However, it will be difficult to hold the figure below 4% for an extended period, given the healthy growth momentum in the domestic economy. "We have stuck to an inflation forecast of 5.3% in FY24 despite the current softness in the CPI trajectory."