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CPI Inflation Rises To An Eight-Month High In June 

Retail inflation continued to rise in June, led higher by food prices, particularly in urban areas.

Customers shop at a vegetable stall in a market in New Delhi, India. (Photographer: Anindito Mukherjee/Bloomberg)
Customers shop at a vegetable stall in a market in New Delhi, India. (Photographer: Anindito Mukherjee/Bloomberg)

Retail inflation continued to rise in June, led higher by food prices, particularly in urban areas.

Consumer Price Index inflation stood at 3.18 percent in June 2019 compared to 3.05 percent in May 2019, according to data released by the Ministry of Statistics and Program Implementation on Friday. Inflation in food and beverages rose to 2.37 percent, the highest in 12 months, driven by pulses and meat products.

A Bloomberg poll of 38 economists had estimated inflation at 3.13 percent for June 2019.

Despite the consistent pick-up in inflation, it remains well below the target of four percent (+/-2), leaving room for the Monetary Policy Committee to cut rates further. The policy repo rate has been pared by a cumulative 75 basis points in 2019.

CPI Inflation recorded only a modest uptick despite the delay in the monsoon and kharif sowing. While food inflation hardened to 2.4 percent, the impact was partly offset by a mild dip in core inflation to 4.2 percent in June 2019, said Aditi Nayar, principal economist at ICRA.

Inflation Internals

Break-up of the inflation data shows a widening gap between rural and urban price increases, perhaps an indication of low wage growth in rural areas.

  • Rural inflation stood at 0.43 percent in June 2019 as against 1.86 percent in May 2019.
  • Inflation in urban areas stood at 5.56 percent, compared to 4.51 percent the previous month.
  • Food and beverages inflation rose to 2.37 percent in June 2019 compared to 2.03 percent in May 2019. Once again, rural food inflation was subdued at 0.43 percent while urban food inflation spiked to 5.56 percent.
  • Clothing and footwear inflation was at 1.52 percent compared to 1.8 percent in May.
  • Fuel and light inflation stood at 2.32 percent compared to 2.48 percent last month.
  • Housing inflation stood at 4.84 percent in June compared to 4.82 percent in May.

Food Inflation Driven By Urban Areas

The pace of growth of urban food prices continues to outstrip growth in rural food prices. The divergence was steepest for food items with shorter shelf life.

While prices of vegetables rose by 17.6 percent annually in urban areas in June, vegetable prices contracted by 2.02 percent in rural areas. 

Prices of fruits rose by 0.92 percent in rural areas while they contracted by 7.01 percent in rural areas. Differential weightage of these items in urban and rural areas might have contributed to the divergence, said Soumyakanti Ghosh, chief economist at State Bank of India.

Room For Monetary Easing

With inflation staying below the mid-point of the MPC’s inflation target and the government staying from any direct fiscal stimulus, more interest rate cuts may be in the offing.

“We believe the lack of fiscal impetus in the recent union budget opens the door for higher monetary easing than market expectations,” said Tanvee Gupta Jain, chief India economist at UBS, in a July 10 note. Slowing growth and benign inflation will allow the Monetary Policy Committee to cut rates by a further 75 basis points, bringing the cumulative easing to 150 basis points in this cycle, she said.

The current negative gap in both inflation and GDP growth could prompt the MPC to opt for another 25-basis-point cut in the forthcoming policy review in August, according to Shubhada Rao, chief economist at Yes Bank. Possibility of additional easing could emerge in the second half FY20, Rao said in a July 8 note.

Although transmission of the previous rate cuts remains incomplete, the MPC may choose to frontload another rate cut to provide a boost to the outlook for economic growth, said Nayar.