Retail inflation rises to 3-month high; industrial output inches up

India’s retail inflation reversed its four-month downward trend in June on surging food prices, though it remained within the Reserve Bank of India’s (RBI’s) upper tolerance limit, prompting some analysts to predict an extended pause on policy rates.
The Consumer Price Index (CPI)-based inflation rate rose to a three-month high of 4.81 per cent year-on-year (YoY) in June, as against 4.31 per cent in the previous month, because of a sharp increase in the prices of food & beverages and services, data released by the National Statistical Office (NSO) showed on Wednesday.

The Index of Industrial Production (IIP), on the other hand, recovered to a three-month high of 5.2 per cent in May, despite a high-base effect, due to good performance by manufacturing, mining and electricity sectors, according to the data.

Food inflation rose sharply to a three-month high of 4.49 per cent in June from 2.96 per cent in May, mainly driven by an acceleration in the prices of cereals (12.71 per cent), fruits (1.36 per cent), meat (1.41 per cent), egg (7.03 per cent), pulses (10.53 per cent), and sugar (3 per cent). The prices of milk (8.56 per cent) and non-alcoholic beverages (3.63 per cent) saw slight deceleration, while the prices of edible oils (-18.12 per cent) contracted further in the month.

Rajani Sinha, chief economist, CARE Ratings, said that while part of the increase in food prices was seasonal, for some items like vegetables, the increase was more than a seasonal pattern. “With high inflation for basic food items like rice, pulses, vegetables and milk, the central bank will be concerned about the adverse impact on household inflationary expectations. The RBI is expected to remain cautious and maintain an extended pause in 2023,” she added.

Echoing similar views, Aditi Nayar, chief economist at ICRA, said that amid the ongoing excess rainfall in North India, the prices of perishables, particularly vegetables, might harden further, pushing up food inflation in the immediate term. “The vegetable price shock is expected to result in the Q2 FY2024 CPI inflation exceeding the central bank’s forecast of 5.2 per cent. Accordingly, the MPC is expected to retain its hawkish tone in August 2023, keeping the repo rate unchanged, and may signal that a pivot to rate cuts remains distant,” she added.

IIP growth rose in May, largely due to an acceleration in output growth in manufacturing (5.7 per cent), mining (6.4 per cent), and electricity (0.9 per cent), the data showed. Growth in output of primary goods (3.5 per cent), infrastructure goods (14 per cent), consumer durables (1.1 per cent) and capital goods (8.2 per cent) accelerated in May, whereas the output growth of intermediate goods (1.6 per cent) and consumer non-durables (7.6 per cent) decelerated.

Madan Sabnavis, chief economist, Bank of Baroda, said that though FMCG production had picked up in May due to some revival in rural demand after rabi harvest, the consumer durable segment continued to stagnate. 
 
“Capital goods have done well, both electrical and non-electrical equipment. Infra-related non-metallic minerals and metals have done well in line with higher government capex, though this trend will slow down during monsoon time when activity decelerates,” he added.

Core inflation, which excludes volatile food and fuel items, hovered around 5 per cent due to a slight deceleration in price rise of services like household goods, health, recreation, personal care, and fuel. 

“The transmission of higher input costs [to services] continues notwithstanding announcements made by some consumer goods companies that they would be lowering their prices, given stabilisation in costs,” added Sabnavis.