Rising inflation led by a rise in food prices and a decline in industrial activity is still an area of concern and may warrant further policy tightening, say experts. For the month of August, the consumer price index (CPI) surged to 7 per cent as against 6.71 per cent in July. Though retail inflation was on a downward trend in the last three months, the data marginally increased this month mainly due to increase in food prices. Nearly half of the CPI basket is accounted by food inflation which includes daily essentials like wheat, rice and pulses, which skyrocketed due to various factors like record heatwaves, erratic monsoon pattern etc. As per the National Statistical Office, food inflation soared 7.62 per cent in August 2022.
During this period, core inflation remained stable (6.20 percent YoY). Higher food inflation was led by irregular monsoon distribution and lower sowing. While food inflation saw increases across almost all categories, cereals, vegetables, and pulses saw significant sequential momentum. Meanwhile, core sequential momentum moderated with fixed behavior of sub-segments. Services and housing inflation rose modestly.
Interestingly, the Industrial Production growth also slowed down to 2.4 per cent with sequential declines. Experts say that even as India’s inflation has peaked, it still warrants caution, with core inflation appearing sticky. As per experts from Emkay Global Financial Services, after a moderating trend seen between May-July, inflation has again risen in August driven by accelerating food inflation and a fading of base effect. This is the eighth straight month when inflation has printed above 6 per cent, the upper tolerance limit of the Reserve Bank of India’s (RBI) target. As per the Emkay report, food inflation accelerated significantly to 7.6 per cent in August, from 6.7 per cent in July, driven by jump in cereals, vegetables, pulses and milk and milk products’ prices. Persistent rise in cereal inflation (since May), particularly hints at tight supplies. Wheat inflation was already under pressure after a hit from the heat wave earlier this year and now deficient rain in rice growing regions is putting pressure on rice inflation.
As per experts from CRISIL, non-food inflation moderated slightly to 6.6 per cent from 6.7 per cent in July, reflecting slowing energy inflation (as LPG prices remained unchanged and kerosene prices fell on-month). Sequential fall in petrol and diesel prices eased transport and communication CPI. Experts from CRISIL do point out that an uptick in overall inflation in August, particularly the sharp jump in food inflation, suggests price pressures remain. On the core inflation side, even as input cost pressures have eased for producers, they are expected to pass on the costs to consumers amid demand recovery (particularly in the services component on CPI).
As the same time industrial activity has taken a beating and the sharp slowdown in index of industrial production (IIP) growth – to 2.4 percent on-year in July from 12.7 percent previous month – was a result of unfavourable base effect as well as a sequential decline in activity. "The impact of slowing global growth is beginning to be felt by domestic manufacturing in India too. Key export sectors such as textiles, petroleum products, machinery and equipment saw sequential fall in IIP in July. Though this could gain pace over the next 12 months, as aggressive monetary tightening and elevated inflation hit demand prospects in major advanced economies. Domestic demand also has not lent support to manufacturing either. IIP declined sequentially for both consumer durables and non-durables in July and this might be a result of shifting demand from manufacturing to services," said Dharmakirti Joshi, Chief Economist, CRISIL Ltd
Experts do point out that it is a double whammy of sorts on the economic data. “On a downward slide since April, the CPI rose in August to touch a 7 per cent level. Primarily the rise is due to food, vegetable, and pulses that has led to a rise in CPI. Higher energy prices also pushed inflation higher. The industrial production data too had a negative reading. After double-digit growth in May and June, the July industrial output has declined to 2.4 per cent making it a four month low. Higher crude, LPG, and commodity prices dragged the industrial output. The falling crude and commodity prices may offer a respite for the CPI as well as IIP data going forward. This latest economic data will have a bearing on the MPC meet later this month. Central banks across the globe are raising rates, and curtailing system liquidity to tame the rising inflation,” pointed out Nish Bhatt, Founder and CEO, Millwood Kane International an investment consulting firm.
Experts, however, point out that the rising CPI inflation and the decline in industrial activity may not be an immediate cause of concern. “Overall, the combination of slightly higher inflation and marginally slower growth is not desired. However, it is unlikely to be a concern for the policymakers and or markets at this stage,” pointed out Nikhil Gupta, Chief Economist, MOFSL group.
Experts do believe that there would be continuous challenges in the near term as inflation levels in the economy remain elevated despite a considerable reduction in crude oil price from its recent highs. “Rise in food prices, domestic fuel price level and pressure on the Indian currency continue to pose near term threat on inflation trajectory. These will also guide the upcoming monetary policy action, which has so far already witnessed three policy rate hikes and liquidity tightening measures over last 5 months. However, the strong sentiment on both the business and consumer fronts highlights the economic resilience, which domestic and global business participants are expected to take note of for their India plans,” observed Vivek Rathi, Director-Research Knight Frank India.
