CPI Preview: Inflation Expected To Fall Further Still In May

India's retail inflation is likely to continue to dip further in May after easing to the lowest in nearly six years in April.

The Consumer Price Index-based inflation is projected to ease to 2.98% in May, according to a median forecast of economists polled by Bloomberg. This is after it came in at 3.16% in April—the lowest since July 2019, and below the central bank's target of 4%.

So far, the deceleration in vegetable prices has led the fall in headline inflation. However, vegetable prices inched up sequentially by about 3% month-on-month in May, while prices of cereals and pulses eased, according to Teresa John, economist at Nirmal Bang Institutional Equities. John forecasts headline inflation at 3% in May, with food and beverage inflation at 2.1%—in line with April figures.

Agriculture prospects remain bright on the back of an above normal south-west monsoon forecast, the central bank said at the Monetary Policy Committee meet earlier this month. So far, as of June 1 to June 8, cumulative rainfall was 25% below normal rainfall conditions, but it was 67% above normal from May 23—when the monsoon made its landfall—to present.

Monsoon rainfall can have a significant influence on food inflation, especially perishable prices, stated a note by Rahul Bajoria, India economist at BofA. So far, on food prices, food inflation is drifting below core inflation, as the cycle of higher non-perishable prices has been losing momentum for some time, he explained. In May, vegetable prices are likely to have risen, but by a much smaller quantum than what seasonal trends indicate, he said.

Core inflation—which excludes volatile food and fuel—is seeing signs of a modest uptick after having remained low and stable ever since the pandemic. Core inflation inched up for the fourth straight month in April, coming in at 4.22% annually from 4.2% a month ago, according to Bloomberg.

On its face, higher gold prices in recent months are to blame, and are reflected in the pick up in personal care CPI inflation, which accounts for around 8% of the core basket, stated a note by Nomura. But, incremental pressure also seems to be building in other core sub-categories, the note said.

Post the publication of the India CPI print, US CPI data too will be released, providing more clarity on the impact of the tariffs and future actions of the Fed.