While food inflation reversed an easing trajectory witnessed in May and June to hit as much as 9.62% in July, core inflation, too, inched up to a 21-month peak of about 5.87%, reflecting underlying price pressure in the economy.
Retail inflation spiked to 6.93% in July, against a revised 6.23% in June, despite a purported Covid-induced demand compression in the economy. While food inflation reversed an easing trajectory witnessed in May and June to hit as much as 9.62% in July, core inflation, too, inched up to a 21-month peak of about 5.87%, reflecting underlying price pressure in the economy.
The headline inflation for April and May had hit 7.22% and 6.27%, respectively, but the price pressure was mostly aided by dearer food articles. However, even core inflation has risen from about 4% in March to 5.87% in July. This suggests supply disruptions may have more than offset any demand destruction in the economy following Covid.
Retail inflation remains above the Monetary Policy Committee’s tolerance band of 4 (+/-2)% for 7 of the past 8months. At 7.04%, rural inflation stayed higher than urban, which stood at 6.84%. ICRA principal economist Aditi Nayar said soaring vegetable prices amid heavy rainfall and localised lockdowns contributed to the spike in food inflation in July (with a 90-basis point rise from June).
This is expected to ease a bit in August. “The evolving trends for the ongoing month suggest that the CPI inflation may remain appreciably above 6% in August 2020…. Accordingly, the likelihood that the MPC (monetary policy committee) would persist with a pause in its October meeting has climbed sharply, with a final rate cut likely to be deferred to the December 2020 or February 2021 meeting,” she said. The price stabilisation in crude and retail fuels in recent weeks would ease incremental pressures on CPI inflation in August.
India Ratings chief economist DK Pant said: “Inflation increase at a time of depressed demand is perplexing, which suggests the increase is mainly due to supply disruption not due to demand pressure. Both industrial production (IIP contraction narrowed to 16.6%, year on year, in June from 33.9% in May) and inflation trend suggests different monetary policy action.”
Last week, the RBI had said headline inflation could remain elevated in the September quarter but likely to ease in the second half of this fiscal, aided by favourable base effects.