Sluggish recovery lowers inflation risk

Wholesale Price Index (WPI)-based inflation fell marginally to 5.19 per cent in July from 5.43 per cent in June. This is the third consecutive month that WPI-based inflation has recorded a decline.

The fall came from lower fuel inflation (15 percentage weight in WPI), while food and manufacturing inflation edged up. Similarly, fuel inflation fell by 1.6 percentage points to 7.4 per cent due to a slower rise in petrol prices in the same period.

However, food inflation rose to seven per cent in July from 6.2 per cent previously due to increase in prices of fruits and vegetables. In the case of manufactured food products, it rose to 4.1 per cent from 2.3 per cent in June.

The rise in food inflation was capped by fall in inflation in items such as foodgrain (especially rice), milk, egg, meat and fish in July.

Non-food manufacturing inflation - the Reserve Bank of India (RBI)'s measure of core inflation - edged down to 3.6 per cent in July from 3.9 per cent in June. The fall in core inflation was broad based with lower inflation in textiles, wood and wood products, leather, rubber and plastic products, chemicals and transport equipment.

Falling metal prices also contributed to the lower core inflation in July. Metal products inflation fell to 4.1 per cent and non-ferrous metals inflation eased to 2.5 per cent in July from 3.1 per cent previously.

CRISIL Core Inflation Indicator (CCII), an alternative measure of core inflation, remained unchanged at 3.8 per cent in July. The CCII removes metals from manufactured articles, while measuring domestic demand pressures on prices. This is because metal prices are mostly determined by changing global demand-supply dynamics and volatility in exchange rate rather than domestic conditions alone.

Unlike in RBI's measure of core inflation, the CCII also includes manufactured or processed food prices, as they reflect second-round impact of inflation in primary food articles, and therefore capture domestic demand-side pressures in the economy.

The rise in manufactured food inflation offset the fall in other manufacturing items, leaving the CCII unchanged. Going ahead, upside to CCII will be capped, as economic recovery still remains fragile, while risks of a deficient monsoon have declined in recent weeks moderating risks of a surge in food inflation.

However, increase in fruits and vegetable inflation could play the spoilsport.