A customer holds an Indian one-hundred rupee banknote for a photograph at a in a vegetable market in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)  

From Tomatoes To Onions: Vegetable Prices Push Up India’s Inflation In August

Retail inflation in India continued its uptick for the second straight month, as rising vegetable prices pushed the macro indicator closer to the Reserve Bank of India's (RBI) medium term target.

Consumer price in August rose 3.36 percent over the same month last year, faster than the 2.4 percent rise seen in July, according to data from the Central Statistics Office. Inflation accelerated for the second time after hitting a record low of 1.53 percent in June. Economists polled by Bloomberg had expected inflation to rise to 3.24 percent.

Vegetable prices have been rising sequentially due to seasonal spikes. Onion prices in August jumped nearly 57 percent over last year, and tomato prices surged as well, Bloomberg Intelligence economist Abhishek Gupta said in a note ahead of the data release.

The consumer food price index in August rose 1.52 percent over last year, after having fallen 0.29 percent in July. Vegetable prices went up 6.1 percent year on year, compared to a 3.5 percent decline seen in the previous month.

From Tomatoes To Onions: Vegetable Prices Push Up India’s Inflation In August

Even among core inflation categories, which are not exposed to seasonal volatility, price pressures rose compared to a month ago. For instance, inflation in the housing category rose to 5.6 percent compared to 5 percent last month. Prices of clothing and footware increased 4.6 percent year on year compared to 4.2 percent last month. Some of this increase could be linked to price adjustments following the implementation of the Goods and Services Tax (GST) in July.

August inflation is the last set of price data that the central bank has to work with for its monetary policy review in October. The RBI had acknowledged easing inflation during its August review as it cut the benchmark lending rate by 25 basis points, while maintaining its neutral stance. The RBI expects retail inflation to accelerate 3.5-4.5 percent between October-December.

The RBI is “caught in a bind, in terms of a decision to cut rates”, Soumya Kanti Ghosh, chief economic adviser of State Bank of India research told BloombergQuint over the phone. The inflation trajectory will move upwards from here and is expected to reach 5 percent by March 2018, Ghosh added.

An October rate cut is highly unlikely.
Soumya Kanti Ghosh, Chief Economic Adviser, SBI

The impact of GST on inflation will take a little more time to moderate, Ghosh said, and will happen as the input tax credit benefit percolates to the headline number.

Inflation Internals

  • Food and beverage prices in August rose 1.96 percent over last year, and faster than 0.43 percent seen in July.
  • Fuel and light prices rose 4.94 percent year-on-year, compared to 4.8 percent last month.
  • Prices of clothing and footwear went up 4.6 percent, compared to 4.2 percent last month.
  • Housing prices rose 5.6 percent over last year, compared to a 5 percent rise in July.
  • Pan and tobbacco prices rose 6.8 percent over last year, slightly faster than the 6.4 percent rise seen in July.
  • Prices of sugar and confectionery items went up over 7 percent in August
  • Prices of pulses continued to soften, falling 24 percent in August, continuing the 24 percent drop seen in July too.