Retail inflation in India rose in May just a week after the Reserve Bank of India hiked benchmark interest rates for the first time in four years in an effort to fend off inflationary pressures.
Consumer price inflation stood at 4.87 percent in May compared with 4.58 percent in April, according to data released by the Central Statistics Office. Economists polled by Bloomberg had estimated CPI inflation at 4.9 percent.
India’s six-member monetary policy committee raised the repo rate to 6.25 percent in its June meeting and maintained a neutral stance, saying higher crude oil and housing prices is pushing inflation up. The MPC also added that the “significant rise” in household inflation expectations could feed into wages and input costs.
The RBI now expects inflation to stay between 4.8 and 4.9 percent in the first half of the current financial year.
A strong base effect from the same month last year and prevailing high crude oil prices resulted in higher inflation in May, said Devendra Kumar Pant, chief economist at India Ratings & Research. “Higher retail inflation in May 2018 also originated from food inflation. It increased to three month high of 3.1 percent mainly due to fruits, vegetables, cereals and oil & fats.”
Core-core inflation, that strips out the impact of food, fuel, transportation, and other volatile items, continued to remain sticky. It hit a 45-month high of 6.17 percent in May, according to India Ratings’ calculations. A number of economists have been now citing core-core inflation as a concern. “It is likely that the June 2018 inflation number may breach RBI’s 1HFY19 inflation forecast of 4.8-4.9 percent,” Pant said.
High core-core inflation and sluggish factory output is a bit puzzling.Devendra Kumar Pant, Chief Economist, India Ratings & Research
While the MPC will keep an eye on the impact of crude oil prices on inflation, several other risks remain. These include the staggered impact of housing rent allowance revisions for state government employees, and a hike in the minimum support prices for kharif crop farmers that could add to food inflation.
- Food price inflation stood at 3.1 percent in May compared with 2.8 percent in April.
- Fuel and light inflation stood at 5.8 percent in May compared with 5.2 percent in April.
- Clothing and footwear inflation was at 5.47 percent compared with 5.1 percent in April.
- Housing inflation stood at 8.4 percent in May compared with 8.5 percent in April.
- Inflation in pan, tobacco and intoxicants stood at 8 percent, compared with 7.9 percent in April
Watch this conversation with Aditi Nayar of ICRA on the inflation and IIP data.