Customers buy vegetables from street stalls in the suburb of Bandra in Mumbai, India (Photographer: Karen Dias/Bloomberg)  

CPI Rises Less Than Expected In June But Core Inflation Jumps

India’s retail prices rose at a slower than expected pace in June as food prices rose modestly. Core inflation, however, jumped more than expected suggesting that higher input costs are being passed on due to steady demand conditions.

Consumer price inflation stood at 5 percent in June, compared with 4.87 percent in May, according to data released by the Central Statistics Office. Inflation had fallen to a low of 1.46 percent in June last year, adding an adverse base effect. Factoring that in, economists polled by Bloomberg had estimated CPI inflation at 5.29 percent in June.

The lower than expected reading is in line with the Monetary Policy Committee’s view that retail inflation will be near 4.8-4.9 percent in the first half of the year and at 4.7 percent in the second half of the year.

The inflation data is “hugely positive” as it comes in much lower than consensus, said Shubhada Rao, chief economist at Yes Bank in an emailed comment. The risk of one more rate hike remains, but “the urgency for tightening may get diluted,” Rao added.

Inflation Internals Not Comforting

The fineprint of the inflation data was not encouraging.

Core inflation spiked to 6.4 percent with a fairly broad-based uptrend in miscellaneous items as well as clothing and footwear, noted Aditi Nayar, principal economist at rating agency ICRA. Muted price increase across perishables such as vegetables and fruit led to an unexpected dip in food inflation and kept headline inflation in check, Nayar added.

Among the key components:

  • Food price inflation stood at 2.9 percent in June compared with 3.1 percent in May.
  • Fuel and light inflation stood at 7.14 percent in June compared with 5.8 percent in May.
  • Clothing and footwear inflation was at 5.67 percent in June compared with 5.47 percent in May.
  • Housing inflation stood at 8.45 percent in June compared with 8.4 percent in May.

The elevated core inflation may keep the RBI on guard, said Rao.

Risks From Higher MSPs

Along with existing upside risks from higher commodity prices and stronger demand, the increase in minimum support prices for Kharif season crops will likely add to inflation pressures.

Earlier this month, the Narendra Modi administration increased the minimum support price for kharif crops as it tries to deliver on a promise of doubling farm incomes by 2022. Economists expect the announced MSPs to lead to higher inflation, with the quantum of the impact depending on the level of procurement concluded at the announced support price.

“While the statistical impact on inflation would be 90-95 basis points, realistically, it would be around 40-60 basis points assuming full pass-through on the procured crops,” Suvodeep Rakshit and Upasna Bhardwaj, economists at Kotak Economic Research, had said in a note.

The Monetary Policy Committee had acknowledged the upside risks that may emerge from higher MSPs in June, but had added that clarity on the government’s final decision is awaited. With the MSPs now announced, the MPC may raise its inflation forecast when it meets in August.

“The impact of higher MSPs on inflation, fiscal risks and a string of expenditure announcements by state governments such as the recent crop loan waiver by Karnataka, have resulted in upside risks to the inflation trajectory for the remainder of FY19," said Nayar. ICRA expects another 25 basis point hike in the benchmark policy rate in August.