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CPI Inflation Eases In May On Supportive Base Effect

CPI inflation in May fell to 7.04% but sequential pace of price increases remained elevated.

<div class="paragraphs"><p>A grocery store. (Photo: Vijay Sartape / BQ Prime)</p></div>
A grocery store. (Photo: Vijay Sartape / BQ Prime)

India's retail inflation fell to 7.04% in May from an eight-year high of 7.8% in April, helped by a supportive base effect. Sequentially, the pace of price increases remained elevated with the consumer price inflation index rising 0.94% over a month ago, even though it eased compared to the 1.43% increase seen in April.

A Bloomberg poll pegged May CPI inflation at 7.1%.

Inflation in food and beverages was at 7.97% in May compared with 8.31% in April. Rural inflation eased to 7.01% from 8.38% the previous month, while urban inflation was stable at 7.08%.

Core inflation, according to India Ratings & Research, also fell to 6.07% from 6.96% the previous month.

Retail inflation has remained above the Indian central bank's target of 4 (+/-2)% since January and is seen averaging 6.7% in FY23. The Reserve Bank of India's forecasts peg inflation at 7.5% in the first quarter of the current year.

Inflation Internals

  • Fuel and light inflation stood at 9.54% in May against 10.8% in April.

  • Inflation in oils and fats was at 13.26% compared with 17.28% in April.

  • Inflation in meat and fish was at 8.23% compared with 6.97% in April.

  • Vegetable prices rose 18.26% in May over a year ago compared with 15.41% in April.

  • Pulses inflation was at -0.42% compared with 1.86% in May.

  • Clothing and footwear inflation was at 8.53% versus 9.85% in the previous month.

  • Housing inflation stood at 3.71% compared with 3.47% in April.

On a sequential basis, prices of vegetables rose 5.2% while meats and fish were 2.5% costlier. Oil and fats saw a further 1.45% increase in prices. Among non-food categories, clothing and footwear prices continued to rise, up 1% month-on-month.

"The May 2022 CPI inflation printed mildly higher than our forecast (6.9%) led by food and beverages, fuel and light, and clothing and footwear, while inflation for miscellaneous items trailed our expectation," said Aditi Nayar, chief India economist at ICRA.

The double whammy of the rise in the crude oil prices and the rupee depreciation pose upside risks to the June print, said Nayar adding that the lower momentum in services inflation could provide some relief.

"While vegetable inflation is high at 18.26%, the overall food inflation stood lower at 7.97% vis-à-vis 8.31% in April 2022. Timely monsoon should help in cooling down food inflation further though some volatility is always inherent given the seasonality factor," said Suman Chowdhury, chief analytical officer at Acuité Ratings & Research.

Generalising rising inflation has pushed India's monetary policy committee to raise interest rates by 90 basis points over two meetings in May and June. The committee has shifted its stance to withdrawal of accommodation and is seen raising rates further at its next few reviews.

"For the next few months, we expect CPI inflation to remain sharply above RBI’s upper tolerance limit owing to elevated crude and commodity prices," said Rajani Sinha, chief economist at CareEdge. " Also, with expected improvement in employment situation there is a risk of wage-price spiral setting in, that would make the task of reining in inflation even more difficult," Sinha added.

India Ratings said it expects monetary conditions to tighten further in FY23 as RBI pursues its inflation targeting agenda to rein in inflation and bring it in the band of 4%+/- 2%.