India's CPI Inflation Spikes To 15-Month High At 7.44% In July

India's retail inflation spiked in July, once again exceeding the central bank's target range, largely led by food prices.

The Consumer Price Index-based inflation stood at 7.44% in July compared with 4.87% in June, according to data from the Ministry of Statistics and Programme Implementation released on Monday. That's the highest reading since 7.79% in April 2022.

A panel of economists polled by Bloomberg had estimated a reading of 6.4% for July.

Food and beverage inflation rose to 10.57% during the month from 4.6% in the previous month.

Consumer price inflation exceeded the central bank's target range of 4 (+/- 2)% for the first time since February this year. The spike in vegetable prices, led by tomatoes, would exert sizeable upside pressures on the near-term headline inflation trajectory, the Monetary Policy Committee had said. This jump is, however, expected to correct with fresh market arrivals. 

Excluding vegetables, the increase in the CPI inflation print was relatively tolerable, to 5.4% in July 2023 from 5.2% in the previous month, said Aditi Nayar, chief economist at ICRA.

Barring food and beverages, and pan, tobacco and intoxicants, the inflation in all other groups eased in July vis-à-vis June, offering some relief, she said. Moreover, the core CPI—excluding food and beverages, fuel and light and petrol and diesel—eased to a 21-month low of 5.1% in July.

• Cereal prices rose 13% in July compared with 12.7% in June.

• Inflation in meat and fish rose 2.25% from 1.41%.

• Inflation in eggs was 3.82% against 7.03% in the previous month.

• Inflation in milk and milk products was 8.34% compared with 8.6%.

• Prices of oils and fats declined 16.8%, after falling by 18.12%.

• Vegetable prices rose 37.34% compared with a decline of 0.93%.

• Pulses inflation was at 13.27% against 10.53%.

• Clothing and footwear inflation was 5.64% versus 6.19%.

• Housing inflation was at 4.47% against 4.56% in the previous month.

• Fuel and light inflation stood at 3.67% from 3.92% in June.

On a sequential basis as well, vegetables led the spike, with prices rising by 38.1% in July as compared with June. Cereals, pulses, fruits and spices continued to see a sequential rise in prices.

Among food items, meat, eggs, oils and fats saw a sequential decline.

The data for food prices for early August 2023 is not promising, and headline CPI inflation is expected to print above the 6.5% mark in August before cooling off materially in September, Nayar said.

August CPI print is tracking at 7.5% year-on-year, mainly due to food inflation, while core inflation remains about 5% according to Gaura Sen Gupta, economist at IDFC Bank.

The August print builds-in a more moderate pickup in vegetable prices, with tomatoes showing signs of moderation over the last few days, she said.

"We see upside risk to RBI’s and our FY24 CPI estimate of 5.4%, even after building-in a partial reversal in vegetable prices in September," Sen Gupta said, forecasting Q2 FY24 inflation at 6.8% as compared with the RBI’s estimate of 6.2%.

Moreover, rainfall has been deficient in August so far, which is likely to put upward pressure on food prices amid the lag in Kharif sowing across some crops, Nayar said.

The MPC's latest forecast suggests inflation will remain above 5% through Q1 FY25, based on which ICRA has pushed out the forecast for the earliest cut to Q2 FY25, Nayar said.

While the MPC had emphasised the need to be vigilant and ready to act appropriately to ensure that the effects of shocks do not persist, the bar for a rate hike would be quite high, she said. "In our view, inflation would need to persist above 6% for at least two quarters, amid transmission of pressures to core inflation, to set the stage for a rate hike."