Retail inflation eases in August: Is India past the price peak?

India’s retail inflation eased to 6.83 per cent in August, better than what most economists had predicted. While it was a significant improvement from July when it touched a 15-month high, inflation still remained above the Reserve Bank of India’s upper band target of 6 per cent.

A decline in prices of certain food items, particularly vegetables, has contributed to a decrease in overall inflation. Economists anticipate a continued decline in retail inflation as vegetable prices are expected to decrease further. However, does this signify the end of India’s inflation woes?

Is the worst over?

While economists said that moderation in CPI inflation is comforting, they noted that price pressures could still continue, citing an increase in prices of cereals, pulses, milk and some other items.

Rajani Sinha, Chief Economist, CareEdge Ratings, said “The moderation in CPI inflation to 6.8 per cent in August is comforting. The critical aspect to note is that core inflation has moderated to 4.9 per cent.”

Despite a moderation in overall food inflation, Sinha highlighted the sequential upward momentum in prices of food items like cereals, pulses, sugar and milk. Inflation data released by the NSO for the month of August suggested that prices of some food items are still on an upward trajectory.

“While overall food inflation has moderated, the worrying aspect is that the sequential upward momentum has continued for some food items like cereals, pulses and milk,” Sinha said.

“There is risk of further upward pressure on food inflation given the skewed rainfall and low reservoir levels. The recent spike in global crude oil prices is also concerning. However, a comforting factor is that the continued deflation in WPI will have a lagged impact on CPI inflation going forward. While RBI will remain cautious, we expect an extended pause in policy rates in 2023,” she added.

“Off-peak but above target”

Meanwhile, Radhika Rao, Executive Director and Senior Economist at DBS Group Research, said inflation was “off-peak but above-target” in August.

“August inflation eased to 6.8 per cent yoy from 7.4 per cent in Jul, led by a retracement in vegetables (-6 per cent MoM vs +38 per cent in Jul). The broader food basket, however, stayed firm amidst a hand over from ‘temporary’ to ‘sticky’ pressures in cereals, sugar, pulses and spices, keeping food inflation at 9.9 per cent yoy vs 11.5 per cent in July,” Rao said.

She expects perishable food prices to decelerate further in September on administrative measures, including higher imports, export restrictions, better inter-state supplies, release from buffers and a short crop cycle (for vegetables).

“Non-food should also find relief from a cut in cooking gas prices as well as a moderating core,” she added.

However, Rao made it clear that it is “too early” for the RBI to let its guard down as inflation remains above the 4 per cent medium-term target.

She also highlighted risks to the price outlook from sticky food segments, lower reservoir levels and developing El Nino (as the winter crop approaches), besides a rise in global oil prices.

“The latter’s impact will be more apparent in the tradables-sensitive WPI inflation, while a pass-through to consumer retail fuel is less probable in a pre-election year. With inflation still above target, the RBI MPC is on course to maintain a hawkish pause in October,” Rao added.