Retail inflation at 15-month high in July: Food inflation worries likely to persist in months ahead

Vegetable prices may have led to a surge in inflation in July and with a broad-based hardening of food prices, inflationary pressures are expected to continue for some more time. Households will have to gear up to spend more on food items in the coming months even though prices of tomatoes are beginning to cool, as other items such as edible oil and onions could see higher inflation. However, core inflation may remain range bound. 

Retail inflation, as measured by the consumer price index, surged to a 15-month high of 7.44% in July this year from 4.87% a month ago as prices of food items, especially vegetables, shot up. Inflation in consumer food price index inflation rose to 11.51% in July while inflation in the food and beverages basket jumped to 10.57%. Retail inflation in vegetables surged to 37.34% last month from a deflation of -0.93% in June. 

Prices at the retail level of a number of food items, including cereals and products (13.04%), meat and fish (2.25%), fruits (3.16%), pulses (13.27%) and sugar and confectionary (3.75%), rose in July compared to June. July CPI core inflation was lower at 4.9%. 

“In our opinion, such higher levels of vegetable prices are unlikely to sustain beyond November-December 2023 with shorter cycle of vegetable cultivation and some steps to cool prices likely from the government ; food inflation therefore, is likely to moderate after two to three months,” said Suman Chowdhury, Chief Economist and Head – Research, Acuité Ratings & Research. 

He, however, noted that given such elevated vegetable prices and to an extent the prices of pulses and cereals, the average headline inflation in the second quarter is likely to be even higher than the 6.2% forecast by the Reserve Bank of India. “While our average forecast of CPI inflation is currently pegged at 5.3%, there is clearly an upward bias given the latest data,” he said. 

Analysts also point out that early data for August indicates an increase in prices of a number of commodities. 

“The data for food prices for early August 2023 is not very promising, and we expect the headline CPI inflation to print above the 6.5% mark in August, before cooling off materially in September,” said Aditi Nayar, Chief Economist, Head- Research and Outreach, ICRA. 

Given the CPI inflation print for July 2023, the MPC's revised forecast for inflation for Q2 FY2024 of 6.2% appears to be at risk of being overshot, as the vegetable price shock may not reverse adequately before the next harvest, she further said. Moreover, rainfall has been deficient in August so far, which is likely to put upward pressure on food prices, amid the lags in kharif sowing across some crops.

While WPI inflation remained in the negative territory in July, it narrowed sharply to -1.36% last month from 4.12% in June. Wholesale inflation in primary articles shot up to a 116 month high of 7.57% last month with wholesale prices in food articles jumping up to 14.25%. 

Wholesale inflation in vegetables shot up to 62.12% in July from a deflation of -21.98% in June led by a spurt in prices of not only tomatoes but also onions and potatoes.  

In July, wholesale inflation in a number of food items also remained close to double digits. These included paddy (8.31%), cereals (9.03%), wheat (8.01%), pulses (9.59%), which is likely to translate into higher retail prices in the coming months. 

Core items, however, saw a deeper deflation of 2.2% in July 2023 relative to 2% in June 2023.

Based on the surge in prices of vegetables and other items, the Reserve Bank of India has also upped its inflation forecast for the fiscal to 5.4% from its earlier projection of 5.1%. 

“Going forward, the spike in vegetable prices, led by tomatoes, would exert sizeable upside pressures on the near-term headline inflation trajectory. This jump is, however, likely to correct with fresh market arrivals. There has been significant improvement in the progress of the monsoon and kharif sowing in July; however, the impact of the uneven rainfall distribution warrants careful monitoring,” said the Monetary Policy Committee of the RBI after its meeting on August 8-10. 

ICRA projects WPI deflation to narrow further to just 0.2% in August 2023, before reverting to a year on year inflation in September 2023 after a gap of five months.   

“If the food prices continue to trend upward, the deflationary trend could end, and WPI inflation could turn marginally positive in the coming months. Additionally, the uptrend in global crude oil prices, global edible oil prices, and uneven monsoon distribution domestically pose an upside risk to the outlook,” said Rajani Sinha, chief economist, CareEdge Ratings, adding that the agency expects WPI inflation for this fiscal at a subdued level (in the range of 1-2%) with positive implications for the retail inflation trajectory.