A reversal of a declining trend in retail inflation in August and a sharp slowdown in industrial growth in July presented a double whammy for the government just when it thought price pressure had come down to a more manageable level, and hoped to step up focus on growth. For the central bank, the struggle to tame inflation while ensuring a ‘soft landing’ for the economy may turn out to be longer than indicated in recent commentary.
According to the official data released on Monday, inflation based on the consumer price index (CPI) rose to 7% in August from 6.71% in the previous month. Industrial output growth hit a four-month trough of 2.4% in July, partly due to the waning of a favourable base effect. Both the gauges beat, for the worse, analysts’ expectations.
With the base effect turning adverse, retail inflation may remain under pressure until November if the easing trajectory of global commodity prices reverses, especially due to supply shocks, analysts reckon. Some analysts expect it to inch up further to 7.1-7.2% in September.
With inflation rising again and remaining above its medium-term target of 2-6% for an eighth straight month, the Reserve Bank of India (RBI) is unlikely to sharply cut the extent of its expected rate hike later this month (each of the last three increases has been to the tune of 50 basis points).
This is despite the fact that CPI inflation will likely undershoot the central bank’s 7.1% forecast for the second quarter.
The slowdown in the IIP growth in July is also unlikely to convince the central bank to soften its inflation-control measures yet, more so when advanced economies have sharply hiked their rates (the European Central Bank last week raised the rates by a record 75 basis points), some analysts feel.
Of course, analysts still believe India’s retail inflation has peaked (it hit as high as 7.79% in May) and the latest print is partly driven by the fading of a conducive base effect.
A particular area of concern in the latest inflation print has been food inflation, which accelerated to 7.6% in August, from 6.7% in July. The jump was driven by elevated price pressure in cereals, vegetables, spices and fruit. Wheat inflation remained in the double digits, despite a ban in May. With paddy areas falling short of expectations, cereal inflation may continue to pose upside risks to headline inflation in the coming months.
While the government has imposed curbs on certain varieties of rice exports to keep local supplies steady, it may have to initiate more supply-side measures to ease price pressure in food, especially in spices where the inflation was as high as 14.9% in August.
Also, as economists at India Ratings pointed out, higher cereals inflation in rural areas compared to urban areas since June 2021 is adversely impacting rural demand when nominal rural wage growth is lower than rural inflation (which hit 7.15% in August). “This implies squeezing of rural household purchasing power, which is getting reflected in the subdued growth in the consumer non-durables segment of the index of industrial production. The output in this segment declined by 2% in July,” they said.
Crisil chief economist DK Joshi said, “The uptick in overall inflation in August, particularly the sharp jump in food inflation, suggests price pressures remain. On the core inflation side, even as input cost pressures have eased for producers, they are expected to pass-on the costs to consumers amid demand recovery (particularly in the services component on CPI).” Joshi expected retail inflation to hit 6.8% in FY23, against 5.5% last year.
Core retail inflation rose to 5.95% in August from 5.75% in the previous month. With this, it has remained above the 5%-mark for 27 consecutive months, according to an India Ratings estimate.
Aditi Nayar, chief economist at Icra, said: “Notwithstanding the undershooting in the 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 bps in its September meeting.”
Fears of a global recession and fresh geopolitical uncertainties have led to a correction in commodity prices from the peaks seen in mid-June. This would augur well for easing domestic input cost pressures and the core-CPI inflation in the next few months, Nayar had said earlier. “In contrast, the robust domestic demand for services poses risks, given its significant share in the CPI basket (services: +23.4%), and hence, remains a key monitorable, along with the significant lag in kharif sowing of rice,” she had said.