High food prices keep India's retail inflation above 6% in August

Experts said consumers would continue facing higher prices than the previous year due to supply and production bottlenecks as economic activity struggles to come back to normal
The consumer price index(CPI)- based inflation came in at 6.7 per cent for August, from 6.73% in July, courtesy food inflation refusing to soften below 9 per cent.

India’s economy now struggles to cope with low growth and high inflation five months into the Covid-19 pandemic.

The retail inflation has now remained above the upper band set by the Reserve Bank of India of 6 per cent for nine consecutive months, though not successively for three financial quarters yet. Core inflation, too, has been inching up in the pandemic era, approaching 6 per cent now, from 4 per cent earlier this year.

Experts said consumers would continue facing higher prices than the previous year due to supply and production bottlenecks as economic activity struggles to come back to normal. Nomura’s India Business Resumption index had hovered between 70 and 75 per cent in August, and stands at 82 per cent in mid-September. This hardening of consumer inflation above 6 per cent makes a further rate cut difficult in RBI’s monetary policy committee meeting in the first week of October, suggesting that the rate-cut cycle to propel growth may be paused. Aditi Nayar, principal economist at ICRA, said the RBI could take a cautious step in terms of monetary stance, in addition to a pause in repo rates, as inflation is unlikely to recede meaningfully this month. “The CPI inflation is likely to print sub-4 per cent only in December 2020-February 2021, based on which a continuation of the accommodative stance appears doubtful,” she said.

However, favourable base effect will come into play in the upcoming months. As retail inflation had inched up above 7 per cent towards the end of 2019, it is set to moderate in upcoming months.

Experts are factoring in a favourable harvest of the kharif crop, owing to good rains. “With favourable monsoon and prospect of good kharif and rabi crops, India Ratings expects that food inflation will ease from here on,” Sunil Kumar Sinha, principal economist at the agency said in a note.  Inflation in vegetables, pulses, eggs, and meat remained above 10 per cent in all these food categories. For the staples, rice and wheat, it dipped below 6 per cent after four months.

As consumer inflation remained hard, the wholesale price index (WPI)-based inflation made a comeback in August, with a marginal 0.16 per cent rise after four months in deflation. Wholesale inflation had reached a 4.5-year low of negative 3.4 per cent in June 2020, after which it has been consistently rising.

It was pulled up by the rising prices of manufactured products in August, whose WPI inflation at 1.3 per cent is a 15-month high. Among the sub-segment, prices of manufactured food products rose the fastest at 4.7 per cent, as vegetable oils and animal oils, fats saw a sudden uptick in their prices. However, seven of the 14 components within the manufactured products segment have recorded a contraction in the latest month.

On the other hand, food inflation rose 3.8 per cent, lower than July’s 4.1 per cent. The modest decline in food inflation was driven by the downtrend in items such as cereals, pulses, vegetables, and milk. Experts said the sudden inflationary pattern in August indicates an improvement in purchasing power of manufacturers, and bodes well for economic recovery.

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