Retail inflation could ease to the lowest in five years in July because of the base effect and despite continuing food pressures.
The Consumer Price Index inflation is projected to ease to 3.6% in July, according to a median forecast of economists polled by Bloomberg. If that happens, it will be the lowest print since August 2019 and will be the first time since September 2019 that inflation will also be within the RBI's target of 4%. To be sure, in January 2021, too, inflation was almost on target at 4.06%.
The expected moderation in July CPI inflation below the 4% mark is on account of an exceptionally favorable base effect, said Kaushik Das, chief economist at Deutsche Bank. Last year, CPI inflation had touched 7.4% in July, led by a sharp spike in tomato prices.
Inflation was at 5.08% in June, amid a rise in food prices led by vegetables. At its meet earlier this month, the Monetary Policy committee maintained a status quo on the benchmark lending rate at 6.5% and continued to sound cautious on consistently elevated food inflation.
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Food Pressures To Persist?
For the month of July, while prices of onions and potatoes saw a rise on an annual basis, tomatoes saw a decline. Potatoes were costlier by almost 55%, while onions were costlier by 65%, according to data from the ministry of consumer affairs. Tomato prices fell by 40% on an annual basis.
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Ideally, CPI inflation should have fallen below 3% year-on-year in July this year, but given the spike in recent vegetable prices, a large part of the favourable base effect has got offset, resulting in a higher-than-anticipated CPI outturn, said Das, who forecasts inflation at 3.73% in July on an annual basis and 1.6% month-on-month.
Barclays estimates CPI inflation to slow to 3.3% year-on-year in July (5.08% in June). The moderation is driven by base effects (CPI inflation was 7.4% in July 2023). On a sequential basis, retail prices likely rose 1.1% month-on-month nsa, slightly slower than 1.3% in June, said Shreya Sodhani, regional economist at Barclays.
Upward momentum in prices was visible across food, fuel and core CPI, in part led by a seasonal uptick in perishable food items, and electricity and telecom tariff hikes, she said.
Telecom tariffs have also been hiked from July, and if that impact is accounted fully, that will also push up headline inflation by about 20-25 basis points, Das said.
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