It has been a while since the Reserve Bank of India (RBI) entered the second half of a month with good news on the inflation front. June has been different then, with the week following the Indian central bank's decision to leave the repo rate unchanged at 6.5 percent seeing matters become more comfortable on the price situation front.
Headline retail inflation fell to a 25-month low of 4.25 percent in May, data released on June 12 showed, while wholesale inflation plummeted to a seven-and-a-half-year low of minus 3.48 percent last month, as per commerce ministry data from June 14.
Of course, the role of a favourable base effect in dragging inflation down cannot be denied. But hope remains, particularly as input costs keep falling.
"…after a gap of more than two years, the decline in industrial raw material costs is now outpacing the decline in output prices (core inflation). Industrial raw material costs are lower by 8 percent year-on-year in May, indicating that producer margins could improve further in April-June," Gaura Sen Gupta, IDFC First Bank's India economist, said in a note.
But with the summer upon us, it is food prices that are in focus. And some breathing room was offered by a key input.
Dear dairy
In May, the index of fodder in the WPI fell by 4.1 percent on a month-on-month basis, the largest such fall since July 2018.
Expensive fodder, among other issues, has driven up domestic milk price inflation to multi-year highs, with key cooperatives such as Amul repeatedly raising prices to cover costs. In its June 8 statement, the RBI's Monetary Policy Committee warned milk prices "are likely to remain under pressure due to supply shortfalls and high fodder costs".
Data released since then has probably been better than expected. While Consumer Price Index (CPI) data showed milk inflation was largely unchanged from April at 8.9 percent in May—although the index for the 'milk and products' sub-group did rise by 0.7 percent month-on-month—Wholesale Price Index (WPI) data was comforting.
As per the WPI data, milk inflation eased to a six-month low of 6.8 percent in May after its index rose month-on-month by a minor 0.1 percent. This marginal increase in the index followed a brief respite which saw it falling for the first time in 16 months in April.
Why do milk prices matter? Because the 'milk and products' sub-group accounts for a sizeable 6.61 percent of the entire CPI basket. In the WPI, milk has a weight of 4.44 percent. As such, they can easily influence headline inflation numbers.
To be sure, fodder inflation as per the WPI is still in double-digit territory—well, just about, as it stood at 10.01 percent in May. However, this is the lowest in 16 months and less than a third of the record-high of 31.15 percent that was hit at the start of 2023.
But it wasn't just fodder that cooled in May. Even prepared animal feed prices fell on a sequential basis by as much as 1.6 percent.
Will this trend continue in the summer? Given the uncertainty surrounding the monsoon, it is unlikely. The latest data for June shows retail and wholesale milk prices are up around 0.7 percent from May.
The high cost of feeding animals also translates into more expensive animal-based proteins other than milk.
In May, wholesale inflation for the 'egg, meat, and fish' category nearly tripled to 2.1 percent from April on the back of a 3.7 percent month-on-month increase in the index. This is the largest such increase in the index since September 2021. As per data from the National Egg Co-ordination Committee, prices of eggs were up more than 6 percent on average in June at various centres across the country.