Retail inflation based on Consumer Price Index (CPI) for July could hover between 5.6 to 6.6 per cent mainly on account of higher food prices, a quick poll among economists says. Government would release the number on Monday.

For June, retail inflation and food inflation were 4.81 per cent and 4.49 per cent, respectively. Though the estimated rise in retail inflation will be above the targeted range of (2-6 per cent with median rate of 4 per cent), the possibility of rate hike like the US Federal Reserve or some of the European Banks in India is very remote. Instead, experts are saying that possibility of rate revision is next fiscal (FY 25) only.

A closer look at the retail inflation basket shows food and beverage, combined, have a weight of more than 54 per cent, out of which cereals & products and vegetables weigh 12.35 and 7.46, respectively. Wheat is leading the price rise among the cereals group, while tomatoes lead the price rise of vegetables. The erratic movement of monsoon is also impacting food prices. All these are expected to take food inflation to above 5.5 per cent which, in turn, will push the headline inflation further.

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In a note, a team of Economists at HDFC Bank said, “Inflation for July is expected to print at 6.6 per cent. The RBI currently assumes a normal monsoon for August and September, but the IMD has projected a below normal monsoon in August – this could present further upside risk to the RBI’s inflation forecasts going forward.” 

Aditi Nayar, Chief Economist with ICRA said, “We expect the spike in vegetable prices to push the CPI inflation for July to at least 6.5 per cent.” Though, some economists feel retail inflation could be 5.5 to 5.6 per cent.

Monthly Economic Review, prepared by the Economic Affairs Department of Finance Ministry acknowledged that the recent spike in the prices of ‘fruits,’ ‘vegetables,’ and ‘pulses and products’ owing to weather-related disruptions has led to a sequential increase in food inflation for the month of June 2023. “As inflation has been reined in only recently while threats of supply-side shocks, including El Nino, persist, the RBI and the government continue to be guarded for appropriate and timely policy response,” it said.

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Rise in food prices along with monsoon and possible rise in fuel prices have changed the expectation for the full fiscal. In the August review, MPC said that spike in vegetable prices, led by tomatoes, would exert sizeable upside pressures on the near-term headline inflation trajectory. This jump is, however, likely to correct with fresh market arrivals. There has been significant improvement in the progress of the monsoon and kharif sowing in July; however, the impact of the uneven rainfall distribution warrants careful monitoring. Crude oil prices have firmed up amidst production cuts. Manufacturing, services, and infrastructure firms polled in the Reserve Bank’s enterprise surveys expect input costs to ease but output prices to harden.

“Taking into account these factors and assuming a normal monsoon, CPI inflation is projected at 5.4 per cent for 2023-24, with Q2 at 6.2 per cent, Q3 at 5.7 per cent and Q4 at 5.2 per cent, with risks evenly balanced. CPI inflation for Q1:2024-25 is projected at 5.2 per cent,” it said. In June, the MPC had projected CPI inflation at 5.1 per cent for 2023-24, with Q1 at 4.6 per cent, Q2 at 5.2 per cent, Q3 at 5.4 per cent and Q4 at 5.2 per cent.

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