Inflation pressure may build up again after Oct as economy revives: Experts

Retail price inflation falling in July to a three-month law could be a blip that disappears with rising consumer demand.

India’s retail price inflation falling in July to a three-month low of 5.9 per cent may not last beyond October-November as consumer demand rises, supplies crimp and the low-base effect of 2020 wanes, experts have said.

The consumer price index (CPI)-based inflation rate moderated to come with the central bank’s monetray policy committee's ( MPC) tolerance limit due to a decline in the rate of price rise in food items, particularly sharpening deflation in vegetables. Economists believe that the MPC may not raise the policy rate until at least the third quarter of the current financial year since it seeks to ensure economic growth with liquidity.

Pronab Sen, India’s former chief statistician, told 'Business Standard' consumer demand may rise quickly. “This means that there is damage to the supply side. While pricing power of the big corporates have gone up, that of MSMEs have not come back,” he said.

The MPC’s latest policy review said input prices are rising across manufacturing and services sectors. It also said that weak demand and efforts towards cost cutting are tempering the pass-through to output prices.

Soumya Kanti Ghosh, chief economic advisor at the SBI group, believes that this downward trajectory of CPI inflation might be a blip. “As the economy opens up, the second-round pass through from fuel prices will gather momentum.”

Fuel price factor

Fuel inflation was high in July despite some moderation from June. Petrol was at 23.70 per cent inflation rate against 24.54 per cent in June. Diesel inflation moderated to 22.71 per cent compared to 28.70 per cent.

Seasonally adjusted month-on-month momentum of core inflation rate (which does not take into account food and fuel inflation rate) is now closer to the trend. “Core is currently at 5.94 per cent and we expect it to go up from these levels,” said Ghosh.

Our (SBI group’s) full year forecast of the average inflation rate is 5.9 per cent for 2021-22-- higher than the MPC’s estimates at 5.7 per cent, he said.

The MPC also expected the inflation rate to be 5.9 per cent in the second quarter of the current financial year. If this turns out to be true, inflation rate might rise in August and September or one of these months compared to the July figure.

Madan Sabnavis, chief economist at CARE Ratings, said the inflation rate would remain 5-5.5 per cent in the next two months and then increase. .The inflation rate was down in July on a high base effect which will last till September-October, he says.

“Core will remain sticky and rise,” Sabnavis said, pointing out that service prices are going up.

Even health services, a segment crucial during the Covid-19 pandemic, saw inflation rate rising moderately to 7.74 per cent from 7.71 per cent.

Devendra Pant, chief economist at India Ratings, said the decline in the retail inflation rate in July was due to base effect and slow price build-up.

“The base effect will continue to help inflation slide at least till November, 2021. Inflation is expected to decline slightly in the third quarter,” he believes.

”We expect the CPI inflation rate to be somewhat sticky in the coming months, but over the next six months, see it modestly trending lower,” said Rahul Bajoria, chief India economist at Barclays.

Disruption risk

Aditi Nayar, chief economist at ICRA, said with the inflation expected to remain sticky in the 5-6 per cent range over the next three quarters, it is increasingly difficult to characterise the pressures as purely transitory. "A small disruption could push inflation back above the 6 per cent threshold,” she said.

Rumki Majumdar, economist at Deloitte India, said: "We believe that inflation may ease in the coming months assuming no rise in infections. However, high oil and commodity prices will keep the pressure on prices."

Sabnavis says Kharif crop and its price effect would be the crux.

Sowing of Kharif crops gained momentum and hit almost 2020 levels during the week ended August 13. However, concerns remained over the final output because of delay in the planting of some crops, which have crossed their ideal sowing time.

According to latest data from the department of agriculture, Kharif crops have been planted in around 99.7 million hectares till August 13, which is just 1.78 per cent less than the same period last year. It is 2.08 per cent more than the average area covered during the last five years.

Food inflation rate dropped to 3.96 per cent in July from 5.15 per cent in June, as deflation (the rate of fall in prices) in vegetables rose to 7.75 per cent from 0.70 per cent. Cereals also saw deflation, but it moderated to 1.75 per cent from 1.94 per cent. Sugar and confectionery entered deflation at 0.52 per cent from inflation of 0.79 per cent.

However, certain items saw an elevated rate of price rise. For instance, the inflation rate in eggs rose to 20.82 per cent in July from 19.35 per cent in the previous month.

Also, the rate of price rise in pulses saw moderation after the government intervened to make their imports cheaper. However, it still remained at 9.04 per cent in the month, down from 10.01 per cent in June. Similarly, the inflation rate in oil and fats was at 32.53 per cent compared to 34.78 per cent. Fruits were at 8.91 per cent against 11.82 per cent.

Pant said that ideally average inflation towards the upper end of RBI's inflation target should prompt monetary authority to move away from ultra-loose monetary policy. “However, with growth concerns taking priority, RBI would stay put on rates throughout FY '22 but address the systemic liquidity,” he said.

Nayar said the July inflation rate would help in quelling anxiety about the immediacy with which rates need to be hiked by MPC.

She expected MPC to embark on policy normalisation once domestic demand strengthens and starts dominating inflationary pressures, in place of supply-side issues later this financial year.