Retail inflation jumps to 4.81% in June on surge in food prices

Food inflation, which accounts for nearly half of the Consumer Price Index (CPI) basket, surged to 4.49% in June from 2.96% in the previous month.

Snapping four-months of falling streak India’s headline retail inflation jumped to 4.81 per cent in June due to surge in food prices that will force the Reserve Bank of India (RBI) to retain its hawkish tone in its August policy review and signal that the pivot to rate cuts remains distant.

Food inflation, which accounts for nearly half of the Consumer Price Index (CPI) basket, surged to 4.49 per cent in June from 2.96 per cent in the previous month.

Cereals became costlier by 12.71 per cent while the prices of pulses surged by 10.53 per cent year-on-year during the month under review. Prices of spices surged by 19.19 per cent; milk and milk products became costlier by 8.56 per cent and prices of egg surged by 7.03 per cent in June when compared with the same month last year.

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Fruits became costlier by 1.36 per cent. However, vegetables in June 2023 were cheaper by 0.93 per cent when compared with the prices in June 2022, as per data released by the National Statistical Office (NSO) on Wednesday.

Inflation data for vegetables looks good mainly due to the high base effect.

According to analysts, the CPI-based retail inflation, which the RBI monitors for its policy action, is likely to jump above 5 per cent in July.

“The spike in vegetable prices is set to push the CPI inflation to an uncomfortable 5.3-5.5 per cent in July 2023,” said Aditi Nayar, chief economist at ICRA.

There has been a sharp jump in vegetable prices in the past few months. Tomato prices soared by 160 per cent in the first week of July on a month-on-month basis, as per IDFC First Bank Economic Research data. Informal market data indicates even sharper increase in tomato prices across the country. The price of tomatoes have soared above Rs 200 per kg in several parts of the country. These surge in prices will be reflected in July inflation data.

“We expect the vegetable price shock to result in the Q2 FY2024 CPI inflation exceeding the MPC's last forecast of 5.2 per cent,” Nayar said.

Core inflation in June was nearly unchanged at 5.1 per cent. According to senior economist at Kotak Institutional Equities Suvodeep Rakshit, the core inflation is likely to moderate over the next few months.

“Overall, we see upside risks to CPI inflation over the next few months as monsoon-related risks on food prices play out,” said Rakshit.

The RBI’s Monetary Policy Committee in June decided to keep the policy repo rate unchanged at 6.5 per cent. The central bank is expected to keep rates unchanged in its next policy review scheduled in August and also likely to signal extended pause on rates.