By Ritika Chhabra
The rapid rise in consumer prices is showing no signs of abating. The latest CPI print shows that the inflation rose by 7.41% in September, vs. 7% in August. This is the ninth back-to-back month where inflation has been above RBI’s upper tolerance limit of 6%. On a sequential basis, the prices accelerated by 0.57% m-o-m. The jump was driven by high food prices that rose by 8.4%, the highest since Nov 2020. Within food, the main culprit was Cereal prices, which rose by 11.53% y-o-y mainly led by rice and wheat. A decline in acreage under rice and pulses and erratic rains are weighing on food prices. The fuel inflation, on the other hand, slowed year on year to 10.4% from 10.8% during the previous month, due to moderation in prices of LPG and kerosene. The core inflation that excludes food and fuel soared 6.0% y-o-y against 5.9% in August, indicating stickiness in core prices.
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The inflation is expected to remain well above 6% for the rest of the calendar year. While there might be some softening in food prices in October as a result of sequential reversal in the prices with fresh harvest, this reversal in prices will be offset by the damage to crops due to heavy showers in early October. The unseasonal rains ahead of the harvest season have reduced and deteriorated summer-sown crops such as rice, soya bean, cotton, pulses, and vegetables, while also impacting the plantation of wheat. This will keep the food prices sticky for a longer time. There are other upside risks to inflation. OPEC+’s decision to cut oil supply in a bid to spur a recovery in oil prices might arrest the fall in international energy prices seen over the last couple of months. In addition, a strong US dollar and a resulting weak rupee will further translate to imported inflation seeping into domestic retail prices.
That said, the prices are expected to moderate early next year. The high base effect and slowdown in demand are likely to bring inflation below 6% by Q1 FY 2023-24. Due to the lag effect of the interest rate hikes by central banks, global demand is expected to slow down which will start to show at the beginning of next year. This drop in global demand is expected to further drag down energy and other commodity prices and will bring down the imported inflation, provided the geopolitical tensions do not escalate. Also, domestic consumption is expected to normalize once the festive season is over, thus keeping services inflation under check. As the global slowdown materializes and remains entrenched, we expect domestic inflation to come down in the range of 5-5.5% in FY24.
(Ritika Chhabra is the economist and quant analyst at Prabhudas Lilladher. The views expressed are the author’s own and do not reflect the official position or policy of FinancialExpress.com.)
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