Retail inflation Rises Back Up To 7% In August After Falling For 3 Months

Retail inflation rose to 7 per cent in August, stalling a three-month downtrend on soaring food costs, pressuring the Reserve Bank of India to hike rates more aggressively to tame surging prices even at the cost of the economy.

That shows inflation has remained above RBI's 2-6 per cent tolerance band in each month this year.

Data released by the National Statistics office showed, consumer price index-based inflation (CPI) in August was higher than a Reuters survey of economists, rising to 7.0 per cent from a year ago, compared to the 6.9 per cent forecast, and above July's 6.71 per cent.

Food inflation, which accounts for nearly half the consumer price index (CPI) basket, soared as prices of essential crops like wheat, rice and pulses were driven higher by a record heatwave, squeezing already stretched household budgets further.

According to the data, inflation in food basket was 7.62 per cent in August, up from 6.69 per cent in July and 3.11 per cent in August 2021.

Erratic monsoon patterns across the country suggest more crop damages, keeping food prices elevated in the coming months, with negative seasonality kicking in for September-November and weighing on price pressures.

The government has put restrictions on the export of wheat, sugar, and rice in an effort to keep local prices from rising as a result of the country's uneven rainfall distribution.

"Another inflation print of 7 per cent bang in line with our expectation confirms our belief that price pressure is not going to go away anytime soon, although being a year-on-year print, inflation may be off the peak," said Kunal Kundu, India Economist at Societe Generale.

"Expectedly food prices moved up sharply as well. Given the tailwind generated by high food prices as production suffers due to erratic monsoon, we do not see consumers' cup of woes emptying out soon," he added.

Although crude oil prices have dropped significantly in recent weeks, the fuel and light inflation rose 10.8 per cent, suggesting the positive impact of falling commodity prices are not yet reflected and will be muted even when it does show because that makes up a very small portion of all categories.

Household budgets have been hard-hit by the increase in food and fuel prices.

"We have cut down spending on vegetables," Puspanjali Sahu, a resident of the eastern Indian city of Bhubaneswar, told Reuters. "We are not going out to any eatery, we are not watching movies in the cinema hall."

The RBI's projections showed inflation staying above the 6 per cent top end of its target range until early 2023.

While RBI Governor earlier this month said inflation has peaked and will likely moderate to around 5 per cent by the April-June quarter of next year, the latest surge back in price pressures contradicts the central bank's broad expectations and is not good news for a country whose bane has been supply-driven inflation.

The RBI governor also said that the policy aimed to control inflation while minimising any impact on economic growth. But the latest consumer price-based inflation pressures the central bank to act more aggressively and mirror the policy path of major central banks in the West - fight inflation at any cost, including a recession.

The central bank raised its key policy repo rate by 50 basis points (bps) in August to 5.40 per cent, taking the total rise since May to 140 bps. Its next policy decision is due on September 30, with expectations before the inflation data of a rise of fewer than 50 bps.

"We expect an additional 60 bps rate hike by the Reserve Bank of India (RBI) before they bring the rate hike cycle to an end as they shift the focus back to growth given the rather dismal employment situation," said Societe Generale's Mr Kundu.

Further breakdown of the data showed rural inflation above the urban price pressures for the third month in a row.

Separately, the National Statistical Office (NSO) data showed India's industrial production rose 2.4 per cent in July from a year ago, compared to an annual 3.2 per cent in July.