Inflation Rises in August Compare to Last Month, Claims Indian Official Data

To Begin With

A steep slowdown in industrial growth in July and a reversal of a downward trend in retail inflation in August dealt the government a twin blow at a time when it had intended to shift its attention from price pressure to growth. The central bank may have to fight for longer than recently suggested in the comments in order to control inflation and provide a “soft landing” for the economy. This post is included with detailed information on Inflation, Growth Worry Lingers. Have a look for the facts you may require to know.

Inflation Based On the Consumer Price Index (CPI)

Inflation based on the consumer price index (CPI) increased to 7% in August from 6.71% in July, according to the official data issued on Monday. In July, industrial output growth fell to a four-month low of 2.4%, in part because of the diminishing impact of a favourable base effect. Both measures exceeded analysts’ predictions, but not in a good way.

Some Analysts’ Predictions

Analysts predict that if the softening trajectory of global commodity prices reverses, particularly as a result of supply shocks, retail inflation may continue to be under pressure until November. Some analysts predict that it will increase slightly more, to 7.1–7.2% in September.

The Reserve Bank of India (RBI) is unlikely to drastically reduce the magnitude of its anticipated rate hike later this month because to inflation continuing to rise and staying above its medium-term target of 2–6% for an eighth consecutive month (each of the last three increases has been to the tune of 50 basis points).

The CPI inflation rate is expected to be lower than the central bank’s prediction of 7.1% for the second quarter, notwithstanding this.

Some analysts believe that the slowdown in IIP growth in July is also unlikely to persuade the central bank to ease up on its inflation-control measures just yet, especially in light of the advanced economies’ sharp rate hikes (the European Central Bank last week increased rates by a record 75 basis points).

Analysts still maintain that India’s retail inflation has peaked (it reached a high of 7.79% in May), and the most recent reading is in part the result of the base effect’s receding.

As Per the Newest Inflation Report

The newest inflation report has highlighted the issue of food inflation, which increased to 7.6% in August from 6.7% in July. Increased pricing pressure on cereals, vegetables, spices, and fruit was what caused the increase. Despite a prohibition in May, wheat inflation remained in the double digits. Cereal inflation may continue to present upside risks to headline inflation in the upcoming months if paddy regions fall short of estimates.

While the government has restricted the export of some types of rice to maintain local supplies, other supply-side measures may be required to reduce price pressure on food, particularly on spices where inflation reached 14.9% in August.

Additionally, as economists at India Ratings noted, when nominal rural wage growth is less than rural inflation (which peaked at 7.15% in August), as has been the case since June 2021, rural demand is negatively impacted. This is due to higher cereal inflation in rural areas compared to urban areas. This suggests that rural household spending power is being constrained, which is reflected in the moderate expansion of the consumer non-durables sector of the index of industrial production. In July, this segment’s output fell by 2%, they reported.

The Increase in Overall Inflation

The increase in overall inflation in August, especially the strong increase in food inflation, implies that pricing pressures are still present, according to Crisil’s chief economist DK Joshi. In terms of core inflation, Joshi predicted that retail inflation will reach 6.8% in FY23, up from 5.5% the previous year, even though producers’ input cost pressures have lessened. This is especially true for the CPI’s services component.

From 5.75% in July to 5.95% in August, core retail inflation increased. Consequently, it has exceeded 5% for 27 straight months, according to an estimate by India Ratings.

Aditi Nayar, chief economist at ICRA, stated: “We now foresee a higher likelihood that the MPC will stick to the new normal rate hike of 50 bps in its September meeting, notwithstanding the undershooting in the GDP growth relative to the MPC’s projections for Q1 FY23 and the expectation of a slightly lower-than-projected CPI inflation print for Q2 FY23.

The Final Take

Commodity prices have fallen from their mid-June heights as a result of worries about a global recession and new geopolitical uncertainty. According to Nayar previously, this bodes favorably for a reduction in domestic input cost pressures and core-CPI inflation in the coming months. Contrarily, she had stated, “the strong domestic demand for services creates dangers, given its high participation in the CPI basket (services: +23.4%), and hence, remains a key monitorable, along with the significant lag in kharif rice sowing.”