Agriculture Industry

Food items drag retail inflation to three-month low of 5.59% in July

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16 August 2021, New Delhi: Retail inflation fell to a three-month low of 5.59 per cent in July from 6.26 per cent in the previous month as the rate of price rise in food items, particularly vegetables, declined. However, economists cautioned that inflationary pressures might come back if supply is disrupted and demand rises with the economic recovery later in the current financial year.

Fuel inflation remained elevated in July despite some moderation from the previous month. The inflation rate for petrol stood at 23.70 per cent, as against 24.54 per cent in June. For diesel, it was 22.71 per cent compared with 28.70 per cent a month earlier.

Health services, an important category amid the pandemic, saw the inflation rate inching up to 7.74 per cent from 7.71 per cent.

The consumer price index (CPI)-based inflation rate came back within the Monetary Policy Committee’s (MPC’s) tolerance limit after two months. The MPC 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, the inflation rate might rise in August and September or one of these months.

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Aditi Nayar, chief economist at ICRA, said the July inflation rate receded below the MPC’s upper threshold of 6 per cent, which would help in quelling anxiety about an immediate policy rate hike.

Vivek Rathi, director (research) at Knight Frank India, said that with this monetary policy guidance metric in check, households and corporate borrowers alike would continue to benefit from the low interest rate and accommodative monetary stance for a sufficiently long period of time.

Rumki Majumdar, economist at Deloitte India, said the decline in the inflation rate suggested that inflation was largely a function of supply chain disruptions. “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,” she said.

Nayar said the considerable moderation in the inflation rate was primarily led by food and beverages, while the core inflation rate, which does not take into account food and fuel inflation rate, recorded a modest dip. “The softening in the core inflation to 5.7 per cent in July from 5.9 per cent in June provides some relief,” she said.

She expected the inflation rate to remain sticky in the 5-6 per cent range over the next three quarters. “It’s increasingly difficult to characterise the pressures as purely transitory in nature. A small disruption could push inflation back above the 6 per cent threshold, which implies that some uneasiness will continue about how soon the MPC may embark on policy normalisation.”

Nayar anticipated that the MPC would embark on policy normalisation once domestic demand strengthened and started dominating inflationary pressures, in place of supply-side issues, later this financial year.

Even as the food inflation rate dropped to 3.96 per cent from 5.15 per cent, 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.

However, 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 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.

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