Food costs gasoline retail inflation to 7%; IIP at 4-month low

BUCKING THE downtrend of three months, retail inflation rose to 7 per cent in August, marking the eight consecutive month above the higher threshold of the Reserve Bank of India’s goal of 4 +/- 2 per cent, and nearly three years (35 months) of staying above 4 per cent, in accordance with knowledge launched by the National Statistical Office (NSO) on Monday.

The inflation charge picked up on the again of an increase in meals costs, particularly of fruits, greens, spices, cereals, wheat, milk and ready meals, with the next tempo recorded for rural areas than city areas.

In a individually launched dataset by NSO, the Index of Industrial Production (IIP) moderated to a four-month low of two.4 per cent in July as towards a development of 11.5 per cent a 12 months in the past, with tepid development in manufacturing, mining and electrical energy. The industrial output contracted from the earlier month by 2.75 per cent.

Food inflation, as measured by mixed meals worth index, rose to 7.62 per cent in August from 6.69 per cent a month in the past and three.11 per cent a 12 months in the past.

Inflation in rural areas stood at 7.15 per cent in August, increased than the inflation in city areas at 6.72 per cent, with meals inflation at 7.6 per cent and seven.55 per cent, respectively. Cereals inflation rose to 9.57 per cent in August from 6.90 per cent final month, whereas greens inflation elevated to 13.23 per cent from 10.90 per cent. Spices additionally recorded a double-digit inflation at 14.90 per cent in August, up from 12.89 per cent final month.

“Wheat inflation is in double digits due to the unexpected heat wave, which pulled down the wheat output this year. Now, lower areas sown under paddy due to the shortfall in monsoon rainfall in the gangetic plain and neighbouring states is expected to reduce the paddy output. This points towards inflation in cereals remaining at elevated levels,” Sunil Kumar Sinha, Principal Economist, India Ratings and Research, mentioned.

“Also higher cereals inflation in rural areas compared to urban areas since June 2021 is having an adverse impact on rural demand at a time when nominal rural wage growth is lower than rural inflation. This implies squeezing of rural household purchasing power, which is getting reflected in the subdued growth in the consumer non-durables segment. The output in this segment declined by 2 per cent in July 2022,” Sinha mentioned.

Among states, the best inflation charge in August was recorded by West Bengal (8.94 per cent), Gujarat (8.22 per cent) and Telangana (8.11 per cent).

The Finance Ministry mentioned after the info launch that the rise in inflation is “attributable both to an adverse base effect and an increase in food and fuel prices”. It mentioned that core inflation — headline inflation excluding meals and gasoline — was at 5.9 per cent in August, remaining “below the tolerance limit of 6 per cent” for the fourth consecutive month. “Despite erratic monsoons and negative seasonality in vegetable prices, food inflation in August is still lower than the April peak of the current year. With global inflation pressures, inflationary expectations remain anchored in India with stable core inflation…Government has prohibited exports of food products like wheat flour/atta, rice, maida, etc to keep domestic supplies steady and curb rise in prices. The impact of these measures is expected to be felt more significantly in the coming weeks and months,” it mentioned.

With this inflation print, the RBI is one month in need of overshooting its goal for 3 consecutive quarters. The RBI is planning to carry a particular assembly of the Monetary Policy Committee in October after the subsequent inflation print comes on October 12. As per the mandate of the financial coverage framework, if the common inflation charge breaches the 2-6 per cent goal for 3 consecutive quarters, the central financial institution must clarify the explanations for the breach within the inflation goal to the Government.

Going forward, cereals inflation, weak spot in foreign money, elevated international commodity costs, pick-up in companies demand and revision of pure fuel costs are anticipated to weigh on retail inflation charge and therefore, more likely to lead to extra charge hikes by the RBI.

“We expect the CPI inflation print to rise slightly to 7.1 per cent in September 2022, implying a marginal undershooting in Q2 FY2023 vis-à-vis the MPC’s projection of 7.1 per cent for the quarter,” Aditi Nayar, Chief Economist, ICRA mentioned.

“Notwithstanding the undershooting in the GDP growth relative to the MPC’s projections for Q1 FY2023, and the expectation of a slightly lower-than-projected CPI inflation print for Q2 FY2023, we now foresee a higher likelihood that the MPC will stick to the new normal rate hike of 50 bps in its September 2022 meeting, with the headline inflation having reversed to 7 per cent in August 2022,” Nayar mentioned.

In the manufacturing facility output knowledge launched by the NSO, manufacturing sector output, which accounts for greater than three-fourth of the entire weight of the IIP, rose 3.2 per cent in July as towards 10.5 per cent development a 12 months in the past and 13 per cent a month in the past.

Mining sector output contracted 3.3 per cent in July, whereas electrical energy output grew at 2.3 per cent. Capital items output grew 5.8 per cent in July as towards a development of 30.3 per cent a 12 months in the past and 29.1 per cent a month in the past. Consumer durables output grew 2.4 per cent, whereas non-durables contracted 2.0 per cent in July.

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“The IIP growth plunged to a four month low of 2.4 per cent in July 2022, trailing our expectation of 4 per cent, an unfortunate but expected fallout of the base normalisation, heavy rainfall in some areas, and the shift in discretionary consumption to contact-intensive services. The sharp YoY contraction in mining output in July 2022 was a surprise, given the double-digit growth in coal output, and is likely to have been led by the excess rainfall seen during the month. Industrial output was only 2.1 per cent higher than pre-Covid levels of July 2019, with the consumer durables and non-durables segment lagging their pre-Covid levels by 6.8 per cent and 2.5 per cent, respectively,” Nayar mentioned.

While provide disruptions are slowly easing, the weakening international development outlook might weigh on India’s export orders, impacting industrial output over the approaching months, Rahul Bajoria, Chief India Economist, Barclays, mentioned. A robust restoration in home demand will stay a key supply of help for India’s industrial output within the coming months, he mentioned.