Inflation to inch higher still? Incessant rains will add to woes, warn economists

• Food inflation was the major driver of June CPI which hit a three-month high.
• Tomato price inflation was at 64%, onions at 8.1%, and potato at 10.5% on a sequential basis.
• Retail prices of pulses reported double-digit growth for the third consecutive month.
• On a sequential basis, wheat and rice inflation also picked pace in June.

India’s retail inflation is at a three-month high in June at 4.8%, but it may not have reached its peak yet. Many climate related factors have been playing havoc with food inflation, and with most of North India under floods and this will only add to the pinch on the pocket, economists have warned.

“Nine states had inflation above the average while six had above 5% — UP, Uttarakhand, Rajasthan, Kerala, Bihar and Haryana. The recent floods and landslides in the North will tend to push up inflation further in these states on the food side — especially vegetables and fruits which can add another 0.2% to headline inflation,” said Madan Sabnavis, chief economist at Bank of Baroda.

Food inflation is a heavyweight in consumer price inflation (CPI), and drove it up in June, even as core inflation cooled as compared to the last month.

“Food inflation was the major driver for higher headline inflation print; up by 218 basis points month-on-month versus 67 basis points in the last month due to a 12% hike in vegetables prices,” said a report by Phillip Capital.

Price shock: Grains join tomatoes

Vegetable prices however are on top of everyone’s minds, and it could get worse as prices of tomatoes refuse to inch down. In June, its prices went up by 64%. But other key vegetables like onion were high too at 8.1%, and potato at 10.5% – on a sequential basis.

A report by SBI Ecowrap says that the past 10 years data shows that tomato price increase alone did not influence the overall CPI inflation much — except when it is accompanied by substantial increase in price of potato and onion.

“We believe if tomato price increase without any substantial change in potato and onion then average inflation in Q2 FY24 will come near 5.8% yoy but if the TOP (tomato, onion, potato) inflation increases, then CPI might come around 6% yoy in Q2 FY24. Accordingly, average CPI for FY24 will vary between 5.2-5.4%,” says SBI Ecowrap.

Grains are not too far behind either. Cereal and pulses inflation remained elevated in June at 12.7% y-o-y and 10.5% y-o-y, respectively. Retail prices of pulses, especially that of tur dal, have risen 24% y-o-y in June, reporting double-digit growth for the third consecutive month.

Moreover, the sowing in rice and pulses is lower this Kharif season due to delayed monsoons, and that doesn’t bode well for their prices which too are seeing upward pressure.

“On a sequential basis, wheat and rice inflation also picked pace in June. Looking ahead, the sale of wheat and rice from the government’s buffer stock via Open Market Sale Scheme (OMSS) auctions could help cool retail prices of rice, wheat and atta. However, with regards to rice prices, deficient monsoons in West Bengal, a key rice-producing state, could impact sowing, putting upward pressure on prices,” said a report by CareEdge.

Milk inflation moderated in June to 8.6% as compared to 8.9%. But it continues to remain sticky above 8%, reeling from the impact of a continued demand-supply mismatch and high fodder costs.

“Milk prices could remain higher in the coming months, if unabating cereal inflation keeps cattle feed expensive,” CareEdge says.

WPI is comforting, say experts

RBI insisted in the last two monetary policy committee meeting updates that its decision to hold key interest rates is a pause not a pivot. Most experts had been hoping that it would go for rate cuts in the second half of the year, but the inflation picture is putting cold water on their hopes.

“While food prices will create inflationary pressures in the upcoming months due to uneven distribution of monsoon and lower kharif sowing, RBI stance would not be solely contingent on seasonal food inflation,” said Phillip Capital.

Even at 4.8%, inflation is within the tolerance band of RBI, which is 4-6%.

“The RBI will keep a keen eye here and it is almost given that nothing will change in the policy next month. More caution will be expressed on the inflation front,” said Sabnavis.

CareEdge however says that wholesale price inflation (WPI) has been contracting and that is offering some comfort. India’s WPI has been in a deflationary zone for the second month in a row in May, as prices contracted by 3.48%.

“Deflation in WPI will have a lagged impact on CPI inflation going forward. Having said that, RBI would remain cautious and adopt a wait and watch mode. We reaffirm our view that RBI would maintain an extended pause in 2023,” said CareEdge.