Consumer Price Index (CPI) inflation may have hit a two-year high in July, but analysts and economists believe that there is no cause for alarm. Indeed, the chances are the inflation, and in particular food prices, that affect our day-to-day household budgets, may very well be headed downwards, and significantly at that too. Consumer prices rose at a faster-than-expected pace to 6.07% in July compared to 5.77% in June. The combined food price inflation (rural + urban) rose to 8.35% versus 7.79% in June.
Crisil is of the view that increase in CPI inflation is transitory. The research house says that a normal monsoon and proactive steps taken by the government to manage food supply will rein in food inflation this fiscal. “We believe it will take 1-2 months for the benefit of the rains to wash away the rise in food prices,” it says. “Inflation rose for the fourth consecutive month to 6.1% – a 23-month high – in July on the back of rising food inflation and an unfavourable base effect. While food inflation increased to 8.4% (+60 bps), core inflation remained contained at 5.1%. Moreover, categories with inflation higher than 6% accounted for only 23% weight, comprised by food items majorly. Therefore, we believe that the increase in CPI inflation is transitory,” the research house explains.
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Anubhuti Sahay, Head, South Asia Economic Research (India) at Standard Chartered Bank sees inflation dipping to 5% plus levels as early as October. “CPI inflation has hit a two-year high, but we expect the inflation number to come down significantly from October onwards, that is the second half of the current financial year. This optimism stems from the hopes of good monsoon resulting in a robust harvest, especially on the pulses front,” Sahay tells FE Online. “Currently pulses are driving food inflation up, but with a good harvest, we expect the inflation in pulses to enter the negative territory. The impact of this would be that the overall food inflation would slide to levels of 3.90%, compared to the 8% plus levels now,” she adds.
Asked about the likely inflationary impact of the 7th Pay Commission dole outs, Sahay says, “There are two components (of inflation), one is core inflation and the other is food inflation. I believe that the impact of rise in core inflation on the back of 7th Pay Commission dole outs will easily be offset by the drastic fall in food inflation. That is the reason we expect inflation to come down to 5% levels from October.”
However, even though Dr Arun Singh, Lead Economist at Dun & Bradstreet India sees inflation numbers dipping in the coming months, he cautions that RBI also sees upside risks to prices. “All this is dependent on the the impact and hopes of a good monsoon. There are some external factors that should be kept in mind as well. Additionally, while I think that inflation will come down in the coming months, one expects a rise around the time of the GST implementation,” he tells FE Online.