India’s Retail Inflation Exceeds MPC’s Target For Fifth Straight Month
Retail inflation remained above the Monetary Policy Committee’s target for the fifth consecutive month in August, even though it eased marginally compared to a month ago.
Consumer Price Index inflation was at 6.69% in August 2020 compared to a revised estimate of 6.73% in July 2020, according to data released by the Ministry of Statistics and Program Implementation on Monday. Inflation in the food and beverages category rose to 8.29% in August, led by higher prices of pulses, meat and fish.
A Bloomberg poll of 41 economists had estimated inflation at 6.9% for August 2020.
At 6.7%, inflation remained well above the MPC’s target of 4 (+/-2)%, limiting the room for interest rate cuts. This will be the last inflation print before the MPC meets from Sept. 29-Oct. 1.
Retail inflation for food and beverages barely edged downwards, and remained uncomfortably high, said Aditi Nayar, principal economist at ICRA. Core inflation, excluding food and fuel, also inched up.
The core-CPI inflation hardened to a three-month high 5.6% in August 2020, on the back of a surge in the inflation rate for personal care and effects, and pan, tobacco and intoxicants.Aditi Nayar, Principal Economist, ICRA
- Within the food and beverage category, vegetable inflation remained high at 11.4% compared to 11.1% in July, while fruit inflation rose to 1% from 0.1% in August.
- Among vegetables, potato inflation rose to 75% in August from 68.54% in July. Tomato inflation fell to 7% from 10.9% last month. Onion inflation fell to -4.05% in August from 8.14% the previous month.
- Inflation in the meats category was at 16.5% from 17.3% in July; pulses at 14% from 15.7%.
- Inflation in transport and communication was at 11.05% compared to 10.1% in July.
- Clothing and footwear inflation was constant at 2.8% in August.
- Housing inflation stood at 3.1% from 3.3% in the previous month.
- Fuel and light inflation stood at 3.1% from 2.7% in the preceding month.
- Health inflation rose by 4.71% compared to 4.4% earlier.
- Personal care inflation rose to 14.45% in August from 11.5% in July 2020.
Core Inflation Remains High
Despite the sharp fall in demand in the economy, core inflation remained high.
Inflation in items of personal care was led higher by rising prices of gold, silver and other ornaments. Air fare and prices of recreational items also rose. Air fare inflation was up at 142% in August compared to 117% in July.
According to Sunil Kumar Sinha, principal economist at India Ratings and Research, supply disruptions are still having an impact on CPI inflation, with core inflation spiking to a 22-week high. Unless issues related to supply disruptions are addressed, it is unlikely that base effect alone will help in arresting retail inflation, Sinha said.
The high headline and core inflation will likely prompt the MPC to keep rates on hold when it delivers it’s next review on October 1.
“With CPI inflation for August 2020 sticky at a sharp 6.7%, and unlikely to recede meaningfully in September 2020, a repo rate cut in the upcoming policy review seems to be virtually ruled out,” said Nayar.
However, some room for lower rates may open up towards the end of the financial year as inflation falls below 4%.
Retail inflation is expected to soften to sub-4% in the second half of the financial year because of promising trends in monsoon and agriculture, along with a favourable base effect in the coming months, said Siddhartha Sanyal, chief economist at Bandhan Bank.“That may reopen space for the RBI for further monetary easing during early-2021, especially given the stark weakness in growth,” said Sanyal.