Retail Inflation Hits Five-Year Low At 3.54%, Led By Base Effect

India's retail inflation dropped to the lowest since 2019, aided by the base effect even as the momentum in food prices continued to persist upwards.

The Consumer Price Index-based inflation stood at 3.54% as compared to 5.08% in June, according to data from the Ministry of Statistics and Programme Implementation, released on Monday. This is the lowest since August 2019 and it is the first time since September 2019 that inflation is on or below the central bank's target of 4%.

A panel of economists polled by Bloomberg estimated inflation at 3.6% for the month.

Food and beverage prices saw a 5.06% rise in July, compared to 8.36% in June. Vegetable prices rose by 6.83% compared to 29.32% year-on-year. However, on a sequential basis, food and beverage inflation rose 2.5% from June, while vegetable prices rose by 14.1%.

Core inflation, which excludes food and fuel, rose 3.37% as compared to 3.15% in June. This is the first time since September 2022 that core inflation has seen a significant upturn after a consistent decline.

The decline in food inflation was more due to a base effect rather than falling prices, according to Madan Sabnavis, chief economist at Bank of Baroda.

The major pain points remain in the cereals and pulses basket. While inflation numbers may come down due to this effect, the new crop will enter only post September, which will determine the future course of price movements, he explained. Vegetables inflation was also lower, while meat and eggs registered high inflation numbers. These prices too should cool down post monsoon as the rains are not favourable for vegetable crop, he added.

One important takeaway is the rise of core inflation on the back of a rise in telecom tariffs and gold prices, said Suman Chowdhury, executive director and chief economist at Acuite Ratings. "In our opinion, core inflation has bottomed out and is likely to move higher towards 4.0% amidst strong economic activity."

Earlier this month, the monetary policy committee voted for a status quo on the benchmark lending repo rate at 6.5% and continued to sound a note of caution on food inflation.

Key Highlights

• Cereal prices rose by 8.14% as against 8.75% in June.

• Inflation in meat and fish was at 5.97% as compared to 5.39% the previous month.

• Inflation in eggs was at 6.76% as against 3.99% last month.

• Inflation in milk and milk products was at 2.99% as compared with 3%.

• Price of oils and fats declined 1.17% as opposed to a decline of 2.68% in the previous month.

• Pulses inflation rose 14.77% as against 16.07%.

• Clothing and footwear inflation was at 2.67% versus 2.73% in the previous month.

• Housing inflation was at 2.68% versus 2.69%.