Rising vegetable prices unlikely to impact June retail inflation print

Rising vegetable prices may be burning a hole in your pocket, but retail inflation as measured by the consumer price index (CPI) may not reflect this immediately. Official data on CPI-based inflation for June will be released on July 12 and experts believe that retail inflation will not register a sharp uptick due to the higher base effect. 

CPI inflation was at 7.01% in June 2022 with vegetable inflation at 17.37%.   

“We expect CPI inflation to have remained steady in June, with headline inflation at 4.26% year-on-year, versus 4.25% in May. This lack of change in headline inflation masks a sequential pickup in food prices, which we estimate pushed up the headline index by 0.53% month-on-month,” said Rahul Bajoria, MD and Head of EM Asia (ex-China) Economics at Barclays, in a recent note. 

Retail inflation hit a 25-month low in May at 4.25% and remained within the Reserve Bank of India’s target of 4% with a tolerance limit of 2% either side for the third straight month. Retail prices of vegetables were in deflationary territory the last few months and fell 8.18% in May.  

However, vegetable prices, especially of tomato, have seen a significant surge in the past month due to seasonal factors as well as supply related issues. The food and beverages basket has a 45.86% weight in the combined CPI, of this vegetables have a 6.04% weight. 

Bajoria said momentum varies within the food basket. “Persistent price rises are being seen in perishables such as fruits and vegetables, plant and meat protein (pulses, milk and meat, fish and eggs) and spices, while the price of cooking oil is likely the only component that declined further in June, amid falling international prices for this commodity,” he said. Prices for some non-perishable foods rose, as well as a modest pickup in prices of consumer durable goods and electricity tariffs in June. 

Nomura also noted that tomato prices have jumped 57% month-on-month in June and tracking at over 120% so far in July, with price pressures spilling over to other vegetables too. “Vegetables have a 6% weighting in India’s CPI basket and this unusual increase is likely to push headline inflation from 4.3% YoY in May to 4.5% in June,” it said. 

It also warned that if the current trend persists, CPI inflation could potentially be closer to 5.5% in July and August. 

The silver lining, however, is expected to be core inflation, which is likely to remain around 4.5–5% in the coming months. This is also expected to help keep the headline number within the RBI’s tolerance limit.