CPI Inflation Rises To 7% In August

Retail inflation rose after easing for three months.

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India’s retail inflation saw an uptick led by base effect and a rise in food prices.

The Consumer Price Index inflation rose to 7% in August from 6.71% in July, according to data released by the Ministry of Statistics and Programme Implementation on Monday.

Inflation in food and beverages was at 7.6% against 6.71% in July.

A Bloomberg poll of 32 economists had estimated CPI inflation at 6.9%.

Core inflation also rose to 6.11% in August from 6.03% in July, according to Bloomberg data.

Headline inflation remains above the Reserve Bank of India’s upper target for the eight straight month. Given the elevated level of inflation, the Monetary Policy Committee has raised the policy repo rate to 5.4% so far.

The sequential hardening in inflation was largely driven by broad-based rise across the food segment, with a higher inflation in cereals, pulses, milk, fruits, vegetables and prepared meals and snacks, among others, Aditi Nayar, chief economist at ICRA, said.

The miscellaneous and housing segments also witnessed a marginal rise in inflation in August, partly reflecting the strength of the recovery in the services sector.

According to Suman Chowdhury, chief analytical officer at Acuité Ratings & Research, the key driver for the renewed pressure was the rise in food inflation to 7.6%, driven by the higher prices of cereals.

A lower harvest of wheat in the last Rabi season and an expected lower output of rice in the current Kharif season are driving the inflation in the cereal category, he said.

The Kharif acreage is increasingly unlikely to reach last year's level, even as the healthy reservoir levels augur well for timely Rabi sowing, Nayar said.

She forecasts CPI inflation at 7.1% in September.

Inflation Internals

  • Cereal prices rose 9.6% over a year ago, compared with 6.9% in the previous month.

  • Inflation in meat and fish was at 1%, compared with 3% in July.

  • Inflation in oils and fats was at 4.6%, compared with 7.52%.

  • Vegetable prices rose 13.2% over a year ago, compared with an increase of 10.9% in the previous month.

  • Pulses inflation was at 2.5%, compared with 0.18% in July.

  • Clothing and footwear inflation was at 9.91%, the same as a month ago.

  • Housing inflation stood at 4.1%, compared with 3.9% in the preceding month.

  • Fuel and light inflation stood at 10.8% against 11.76% in July.

Supply Side Measures To Help, Says The Government

Prices of major inputs like iron ore and steel have sobered in the global markets. This coupled with the measures taken by the government to rationalise tariff structures of inputs to augment domestic supply has helped to keep cost-push inflation in consumer items under control, the Ministry of Finance said in a tweet, in response to the pick-up in inflation.

With global inflation pressures, inflationary expectations remain anchored in India with stable core inflation, it said.

To soften the prices of edible oils and pulses, tariffs on imported items have been rationalised periodically and stock limits on edible oils have been kept, the ministry said.

The government has prohibited exports of food products like wheat flour/atta, rice, maida, etc., to keep domestic supplies steady and curb rise in prices.

The impact of these measures is expected to be felt more significantly in the coming weeks and months, it said.

Rate Hike Trajectory

"Notwithstanding the undershooting in GDP growth relative to the MPC’s projections for Q1 FY23, and the expectation of a slightly lower-than-projected CPI inflation print for Q2 FY23, we now foresee a higher likelihood that the MPC will stick to the new normal rate hike of 50 basis points in its September 2022 meeting, with the headline inflation having reversed to 7% in August 2022," Nayar said.

According to Chowdhury, the incremental pressures on CPI inflation should be moderate unless there are surprises in the Kharif crop output. Nevertheless, the current inflation levels are high for the comfort of the MPC, which is looking to pare them down below 6.0% by Q3 FY23.

"We, therefore, expect a further rate hike of around 50 basis points by the RBI in the next MPC meet.”