The headline retail inflation based on consumer price index (CPI) for July may drop to 4 per cent or even below that mainly on account of base effect. Economists expect total inflation to be around 3.7 per cent to 3.8 per cent. However, no relief is expected on food and especially vegetable retail inflation.
The last time when headline inflation dipped below 4 per cent was September 2019 when it reached 3.99 per cent. This June headline inflation was 5.1 per cent while last July it was 7.4 per cent. RBI had forecast that CPI headline inflation would experience a favourable base effect of 2.9 percentage points in July. However, despite the decline, the possibility of rate reduction by the Monetary Policy Committee (MPC) in the near future appears unlikely as 4 per cent or below is not durable.
Watch out for milk and mobile tariffs
“The high food price momentum is likely to have continued in July. Large favourable base effects may, however, push headline inflation downwards in July,” RBI Governor Shaktikanta Das said while announcing the decision of MPC last week. Further he cautioned that the impact of the revision in milk prices and mobile tariffs needs to be watched. “A degree of relief in food inflation is expected from the pick-up in the south-west monsoon and healthy progress in sowing,” he said.
Data from Department of Consumer Affairs (DCA) pointed to a month-on-month increase in tomato prices by 62.1 per cent in July, onion prices by 22.6 per cent and potato prices by 18.0 per cent. Prices of key pulses also increased in the range of 0.4 to 4.3 per cent in July. All these are expected to contribute to food inflation as well as headline inflation. Food inflation rose to 8.4 per cent in June and it has averaged 8 per cent since last November.
There are two reasons for sustained higher prices of vegetables. One climate change and second is the rising demand. Anil Kumar Sood, Professor and Co- founder of Institute for Advanced Studies in Complex Choices said: “As incomes increase, we expect middle income families to spend an increasing proportion of their income on meat, eggs, vegetables, and fruits, as consumption of these products are essential for solving the malnutrition problem,” he said.
Rural versus urban
According to the Household Consumption Expenditure Survey, 2023, 50 per cent of households spend between 4.7 and 7 per cent of their total expenditure on vegetables in urban areas. However, the weight assigned to vegetables in urban CPI is just 4.4 per cent. “We do need to review the index weights. In fact, we need to structure the CPI around the income and consumption levels within rural as well as urban areas. Only then, the index will become representative,” Sood said.
Another key issue at this moment is that rural inflation is higher than urban and expected to continue. According to a SBI research report, in June, the gap between urban and rural consumers’ inflation trends was sharp for the fourth consecutive month with rural households paying almost 1 per cent higher prices than urban India. “This is mainly due to the higher food prices and the fact that the rural basket of food items’ weight (54.2 per cent) is higher than the urban weights (36.3 per cent), the report said.