Consumer price index (CPI)-based inflation rose in June 2018, reaching 5%—a five-month high—reflecting that inflation trajectory is on the rise from March. Though food inflation decelerated, what drove up inflation was the firming up of fuel and core inflation. Going forward, concern over rise in inflation will be deepen given the steep hike in minimum support prices for kharif crops, rising global crude prices—many analysts, including at JP Morgan and Barclays, see crude prices holding at $70/barrel in 2018 and the first half of 2019—and the falling rupee. Sustained rise in core inflation should worry the MPC and RBI may increase interest rates. A report by HSBC’s Pranjul Bhandari says headline inflation could rise from 3.6% in FY18 to 5.2% in FY19. Some of the pressures could have a one-year impact, and headline inflation may moderate back to 4.6% in FY20.
Structurally, the report underlines, as India’s output gap gradually closes and turns positive in late FY19, it will add to inflation. Moreover, every component of core inflation has contributed to its rise, while the contribution of health and education is most striking. In fact, the services component within health and education has turned more inflationary than the goods component as price pressures in services cannot be easily traded away.