Retail inflation may rise again in September

Food price pressures are seen to have continued in September while core inflation too could rise due to stronger demand conditions. Analysts expect retail inflation, as measured by the consumer price index, to rise to 5% again in September. 

Bank of Baroda in a recent report said it expects CPI to settle around 5.1% in September 2024, with risks tilted to the upside. “High frequency price data in both September 2024 and October 2024 reflect build-up in price pressure. However, a lot is attributable to seasonal phenomenon. Vegetable prices generally have the trend of correction in the second half, with arrival of fresh crops. However, in the past few years, seasonality coupled with supply side disruption has led to price shocks, especially in tomato and onion getting entrenched. The key upside risks to prices persist for these perishable items with late withdrawal of monsoon,” said Dipanwita Mazumdar, Economist at Bank of Baroda in the report.

“Core inflation is also likely to exhibit upward correction amidst revival in rural demand on the back of improved sowing. This coupled with ongoing festive demand and elevated gold prices as an effective hedge amidst geopolitical conflict, might pose upside pressure on core in the near term,” she further said.

Retail inflation in August was at 3.65%, the second consecutive month when it was at less than 4% and the second lowest in the last five years. Prior to that, it was at 3.6% in July 2024 and at 5.08% in June 2024. Official data on CPI inflation in September will be released on October 14.

Radhika Rao, Executive Director and Senior Economist at DBS Bank said, “Passage of base effects and an uptick in perishable food items due to volatile weather are expected to lead headline inflation up to 5% YoY in September”. She further said that other food sub-segments like rice and key protein sources moderated in the month, along with contained imported price pressures as global oil prices stay capped despite rising Middle East tensions. She added core CPI is expected to elevate telecom tariff and gold prices but undershoot the headline CPI pointing to modest pricing power.

The continued upsurge in vegetables was also highlighted by Crisil’s ‘Roti Rice Plate’ report. The monthly indicator of food plate cost highlighted that on-year, the cost of home-cooked veg thali rose 11%, while that of the non-veg thali declined 2%. “The veg thali cost rose due to increase in the prices of vegetables, which collectively account for nearly 37% of the thali cost,” it said. Prices of onion, potato, and tomato rose 53%, 50% and 18% on-year, respectively, in September because of lower onion and potato arrivals, while heavy rainfall impacted tomato output in Andhra Pradesh and Maharashtra, it further said.

The trajectory of retail inflation will be a part of the ongoing meeting of the Monetary Policy Committee of the Reserve Bank of India. The RBI will announce the MPC statement on October 9 but analysts believe that the central bank’s concerns over inflation and its potential spillovers onto core inflation seems to be de-escalating, even as risks remain. 

“The RBI has made a slow pivot on its food inflation guidance. In the August policy meeting, the MPC warned that ‘Risks from volatile and elevated food prices remain high, which may adversely impact inflation expectations and result in spillovers to core inflation.’ Recent speeches by Governor Shaktikanta Das reflect a more balanced outlook,” said a report by Nomura.

The RBI is however, expected to hold repo rate at 6.5%, which will be the case for the tenth consecutive meeting. In its August meeting, the MPC had projected CPI inflation for 2024-25 at 4.5% with second quarter at 4.4%; third quarter at 4.7%; and fourth quarter at 4.3%, assuming a normal monsoon.