BUCKING THE downtrend of three months, retail inflation rose to 7 per cent in August, marking the eight consecutive month above the upper threshold of the Reserve Bank of India’s target of 4 +/- 2 per cent, and almost three years (35 months) of staying above 4 per cent, according to data released by the National Statistical Office (NSO) on Monday.
The inflation rate picked up on the back of a rise in food prices, especially of fruits, vegetables, spices, cereals, wheat, milk and prepared meals, with a higher pace recorded for rural areas than urban areas.
In a separately released dataset by NSO, the Index of Industrial Production (IIP) moderated to a four-month low of 2.4 per cent in July as against a growth of 11.5 per cent a year ago, with tepid growth in manufacturing, mining and electricity. The industrial output contracted from the previous month by 2.75 per cent.
Food inflation, as measured by combined food price index, rose to 7.62 per cent in August from 6.69 per cent a month ago and 3.11 per cent a year ago.
Inflation in rural areas stood at 7.15 per cent in August, higher than the inflation in urban areas at 6.72 per cent, with food inflation at 7.6 per cent and 7.55 per cent, respectively. Cereals inflation rose to 9.57 per cent in August from 6.90 per cent last month, while vegetables inflation increased to 13.23 per cent from 10.90 per cent. Spices also recorded a double-digit inflation at 14.90 per cent in August, up from 12.89 per cent last month.
“Wheat inflation is in double digits due to the unexpected heat wave, which pulled down the wheat output this year. Now, lower areas sown under paddy due to the shortfall in monsoon rainfall in the gangetic plain and neighbouring states is expected to reduce the paddy output. This points towards inflation in cereals remaining at elevated levels,” Sunil Kumar Sinha, Principal Economist, India Ratings and Research, said.
“Also higher cereals inflation in rural areas compared to urban areas since June 2021 is having an adverse impact on rural demand at a time when nominal rural wage growth is lower than rural inflation. This implies squeezing of rural household purchasing power, which is getting reflected in the subdued growth in the consumer non-durables segment. The output in this segment declined by 2 per cent in July 2022,” Sinha said.
Among states, the highest inflation rate in August was recorded by West Bengal (8.94 per cent), Gujarat (8.22 per cent) and Telangana (8.11 per cent).
The Finance Ministry said after the data release that the rise in inflation is “attributable both to an adverse base effect and an increase in food and fuel prices”. It said that core inflation — headline inflation excluding food and fuel — was at 5.9 per cent in August, remaining “below the tolerance limit of 6 per cent” for the fourth consecutive month. “Despite erratic monsoons and negative seasonality in vegetable prices, food inflation in August is still lower than the April peak of the current year. With global inflation pressures, inflationary expectations remain anchored in India with stable core inflation…Government has prohibited exports of food products like wheat flour/atta, rice, maida, etc to keep domestic supplies steady and curb rise in prices. The impact of these measures is expected to be felt more significantly in the coming weeks and months,” it said.
With this inflation print, the RBI is one month short of overshooting its target for three consecutive quarters. The RBI is planning to hold a special meeting of the Monetary Policy Committee in October after the next inflation print comes on October 12. As per the mandate of the monetary policy framework, if the average inflation rate breaches the 2-6 per cent target for three consecutive quarters, the central bank will have to explain the reasons for the breach in the inflation target to the Government.
Going ahead, cereals inflation, weakness in currency, elevated global commodity prices, pick-up in services demand and revision of natural gas prices are expected to weigh on retail inflation rate and hence, likely to result in more rate hikes by the RBI.
“We expect the CPI inflation print to rise slightly to 7.1 per cent in September 2022, implying a marginal undershooting in Q2 FY2023 vis-à-vis the MPC’s projection of 7.1 per cent for the quarter,” Aditi Nayar, Chief Economist, ICRA said.
“Notwithstanding the undershooting in the GDP growth relative to the MPC’s projections for Q1 FY2023, and the expectation of a slightly lower-than-projected CPI inflation print for Q2 FY2023, we now foresee a higher likelihood that the MPC will stick to the new normal rate hike of 50 bps in its September 2022 meeting, with the headline inflation having reversed to 7 per cent in August 2022,” Nayar said.
In the factory output data released by the NSO, manufacturing sector output, which accounts for more than three-fourth of the total weight of the IIP, rose 3.2 per cent in July as against 10.5 per cent growth a year ago and 13 per cent a month ago.
Mining sector output contracted 3.3 per cent in July, while electricity output grew at 2.3 per cent. Capital goods output grew 5.8 per cent in July as against a growth of 30.3 per cent a year ago and 29.1 per cent a month ago. Consumer durables output grew 2.4 per cent, while non-durables contracted 2.0 per cent in July.
“The IIP growth plunged to a four month low of 2.4 per cent in July 2022, trailing our expectation of 4 per cent, an unfortunate but expected fallout of the base normalisation, heavy rainfall in some areas, and the shift in discretionary consumption to contact-intensive services. The sharp YoY contraction in mining output in July 2022 was a surprise, given the double-digit growth in coal output, and is likely to have been led by the excess rainfall seen during the month. Industrial output was only 2.1 per cent higher than pre-Covid levels of July 2019, with the consumer durables and non-durables segment lagging their pre-Covid levels by 6.8 per cent and 2.5 per cent, respectively,” Nayar said.
While supply disruptions are slowly easing, the weakening global growth outlook could weigh on India’s export orders, impacting industrial output over the coming months, Rahul Bajoria, Chief India Economist, Barclays, said. A strong recovery in domestic demand will remain a key source of support for India’s industrial output in the coming months, he said.