Is the worst of inflation behind us?

Reserve Bank of India Governor Shaktikanta Das in his statement post the Monetary Policy Review earlier this month said that inflation was still uncomfortably high even though it has eased from its surge in April. It declined from 7.79% in April to 7.04% in May and 7.01% in June.

The governor said that India’s inflation trajectory continues to be heavily contingent on the evolving geopolitical developments, international commodity market dynamics, global financial market developments and the south-west monsoon.
 

July 2022 was the seventh consecutive month when the headline retail inflation remained at or above the central bank’s upper tolerance level of 6%.

The RBI panel jacked up the policy repo rate by 50 basis points to 5.4% last week, as it remained focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.
 

The MPC stressed that sustained high inflation could destabilise inflation expectations and harm growth in the medium term.

The results of the Reserve Bank of India’s July 2022 inflation expectation survey of households showed that their median inflation perception moderated by 80 basis points from the May 2022 round of the survey to 9.3%.

Their three months and one-year ahead median inflation expectations also declined by 50 bps and 60 bps, respectively, to 10.3% and 10.5%. While household inflation expectations have eased, they still remain elevated.

Another survey showed that consumer confidence continued to recover from the historic lows seen in July last year, though it remained pessimistic overall.

Consumers’ perception of the prevailing price level as well as inflation declined from the previous round of the survey. They expect a further rise in prices, but see inflation moderating marginally over the next one year.

According to another RBI survey of 42 professional forecasters, inflation is expected to remain at above 7% in the second quarter and moderate thereafter to 6% by the fourth quarter. 

So, how much longer should consumers grapple with the problem of high inflation?

Yuvika Singhal, Economist, QuantEco Research says inflation peaked in Q1, will follow downward trajectory going forward, and after easing in July, it may pick up in August and September. Drop in rice output amid uneven monsoon poses upside risk to food inflation, she says. 

Crude oil is down by 24% since its June peak, reverting to levels that existed before the start of Russia-Ukraine crisis. There has been a correction in global commodity prices, particularly in prices of industrial metals, and some softening in global food prices. Domestic edible oil prices are expected to soften further on the back of improving supplies from key producing countries and government interventions. 

While inflation may have peaked, a relief for consumers certainly not around the corner. It is not until the end of this year that inflation is expected to fall within the top end of RBI’s tolerance band.