Retail inflation jumps to 6-month high of 6.3% on higher food, fuel prices

Retail inflation accelerated to a six-month high of 6.3 per cent in May, breaching the upper tolerance limit of the inflation target range set by the Reserve Bank of India’s monetary policy committee.

Data released by the Ministry of Statistics and Programme Implementation, on Monday, showed that higher inflation was driven by higher prices across sectors — including food, fuel, transportation and communication.

Retail inflation, measured by the consumer price inflation (CPI) index, is the main price gauge that the RBI tracks.The jump could also be attributed to the high base of May 2020 (at 6.27 per cent), on the back of the supply-side disruption caused by the lockdown.

In April, retail inflation had eased to a three-month low of 4.29 per cent, given the localised lockdowns in the aftermath of the second wave, as well as a favourable base effect.

After hovering in the inflation target range from December 2020-April 2021, economists believe that the high retail inflation could be a cause of concern for the central bank, though it may not be in a hurry to tweak the policy rate or its accommodative policy stance.

Supply disruptions owing to state-wise lockdowns in April-May affected inflation, they said.

“Though the stated policy is that growth is more important — which means the repo rate will not be touched — it will be a nagging issue nevertheless, especially if inflation remains in this region,” said Madan Sabnavis, chief economist at CARE Ratings.

He expects headline inflation in the coming months to be elevated despite a high base effect, and the relaxation in lockdown restrictions by most states, which could ease supply concerns.

Earlier this month, the RBI had projected CPI at 5.1 per cent during 2021-22. The central bank expects a normal south-west monsoon and the comfortable buffer stock to help keep cereal price pressures in check. However, rising global crude prices within a broad-based surge in international commodity prices and the high logistics costs are worsening cost conditions.

“These developments could keep the core price pressure elevated, although weak demand conditions may temper the pass-through to consumer inflation,” it had said on June 4.

“Ind-Ra believes a rising wholesale inflation, which is gradually finding reflection in the retail inflation too, will make things difficult for the RBI,” said Sunil Kumar Sinha, principal economist at India Ratings & Research.

Wholesale inflation had hit a record high of 12.94 per cent in May, driven by the continued rise in fuel and commodity prices, as well as the low base effect.

Consumer food price inflation, a metric to gauge changes in monthly kitchen costs, rose to a six-month high of 5.2 per cent in May, compared to 8.3 per cent a year ago. Food inflation is high in meat, eggs, pulses, edible oils, and non-alcoholic beverages.

Experts say higher prices for pulses and edible oil are likely to sustain for the next few months.

Housing inflation increased to a 13-month high of 3.86 per cent in May. Inflation in fuel components hit a nine-year high of 11.6 per cent in May, compared to 1.6 per cent a year ago.

“The rise in global energy prices, coupled with the high domestic taxes, has been pushing fuel prices upwards. The higher fuel prices have also led to an increase in transportation costs that feeds into prices across segments,” said Sabnavis.

Aditi Nayar, chief economist at ICRA, said core inflation has recorded a massive 1.5 per cent month-on-month uptick in May 2021, higher than the 1.0 per cent rise in April 2020, amid the lockdown.

“As a result the core-CPI inflation rose to an 83-month high of 6.6 per cent in May 2021, and is expected to remain above 5.0 per cent throughout FY22.

The phased unlocking of the states may temper the CPI inflation to around 6.0 per cent in the current month,” she said.