Retail inflation hits 5-month high of 3.36% on costlier veggies

Some services saw higher inflation due to GST; RBI may not cut rates in October

The Consumer Price Index (CPI)-based inflation rose to a five-month high of 3.36 per cent in August, from 2.36 per cent in the previous month, as food items, particularly vegetables, turned inflationary from the price fall seen in the previous three months. 

Also, the goods and services tax (GST) made certain services inflationary, dampening chances of the Reserve Bank of India (RBI) cutting the repo rate next month.

Before this, inflation was higher at 3.89 per cent in March. 

Food items witnessed inflation at 1.52 per cent in August, against deflation of 0.36 per cent in July. Within this category, vegetables saw prices rising at the rate of 6.16 per cent, against a price fall of 1.67 per cent. 

However, tomato prices have eased in September, compared to August, which would have an easing impact on inflation. 

Fruits saw a rise in inflation to more than 5 per cent, from over 2.83 per cent.

However, pulses continued to see a fall in prices at over 24 per cent. Also, inflation in sugar and confectionery declined to 7.35 per cent, from 8.27 per cent. 

Aditi Nayar, principal economist with Icra, said the sowing of major kharif crops such as oilseeds, pulses and coarse cereals as on September 8 this year lagged the year-ago levels, which may affect their prices and exert some upward pressure on the CPI inflation in the coming months.  

After an increase in the housing rent allowance, inflation in rent rose to 5.58 per cent, from 4.98 per cent. This has also raised core inflation to 4.6 per cent in August.

Services such as health, transportation and communication, recreation and amusement saw a rise in inflation in August, compared to the previous month, as GST introduction entered its second month. 

However, education and personal care saw a decline in inflation. 

Going ahead, the CPI inflation is expected to harden further in September, led by food and beverages, transport, communication and housing, and cross 4 per cent by November, Nayar said. 

She said while there may be room for further monetary easing with the repo rate at six per cent and the CPI inflation expected to average 3.7 per cent in FY18, there is a low probability of further rate cuts in 2017, given the uptick in inflationary expectations and hardening of core inflation.

YES Bank Chief Economist Shubhada Rao said it is critically important that the food economy is managed, so that the overall CPI remains in control. “We do not expect any rate cuts in October,” she said. 

As such, the monetary boost to declining gross domestic product growth might not be forthcoming.

The RBI reduced the repo rate by 0.25 percentage points to 6 per cent in August, citing a reduction in inflation risks.

The rate cut was the first in 10 months and brought policy rates to a near seven-year low. 

Fruits saw a rise in inflation to more than 5 per cent, from over 2.83 per cent