Retail inflation eases, but still over 7%, IIP hits 12-month high of 19.6% in May

With the inflation print expected to stay elevated in coming months, the RBI is one quarter away from having to explain its failure to keep the inflation within the stipulated band. As per the mandate by the monetary policy framework, if the average inflation rate breaches the 2-6 per cent target for three consecutive quarters, the RBI will have to explain to the government the reasons for breach in the inflation target.

Reacting to the consumer price inflation numbers, Union Finance Minister Nirmala Sitharaman said monitoring of prices will continue to be a part of the government’s pointed attack on inflation.

“We will have to be mindful and watchful of the price movement,” she said. “I will keep monitoring (prices) item by item for anything that goes haywire. This pointed attack on inflation will need to continue.”

She said a favourable monsoon will lead to good production and rural demand. “As RBI has estimated, till the start of the second half of the (fiscal) year, both RBI and government will have to be mindful,” she told reporters in New Delhi.

Food inflation eased to 7.75 per cent in June from 7.97 per cent in May, mainly due to sharp decline in oil and fat inflation. Core inflation — the non-food, non-fuel component of inflation — was at 5.95 per cent, declining to less than 6 per cent after a gap of three months. The moderation in the CPI inflation in June for food and beverages, and miscellaneous items, was almost fully offset by higher inflation for pan, tobacco and intoxicants, clothing and footwear, housing, and fuel and light.

Rural inflation was recorded at 7.09 per cent in June, while urban inflation was at 6.92 per cent as against 7.08 per cent each in May. Rural inflation became higher than urban inflation after a gap of one month. In five out of the last six months, rural inflation has remained higher than urban inflation. Among states, the highest inflation rate was recorded by Telangana at 10.05 per cent, followed by Andhra Pradesh at 8.63 per cent and Haryana at 8.08 per cent.

In June, food and beverages inflation stood at 7.56 per cent as against 7.84 per cent in the previous month. Vegetables and oils and fats inflation stood at 17.37 per cent and 9.36 per cent, respectively, as against 18.26 per cent and 13.26 per cent earlier. Cereals and products inflation was 5.66 per cent in June as against 5.33 per cent in May. Fuel and light inflation was 10.39 per cent in June compared with 9.54 per cent in May, while clothing and footwear inflation was at 9.52 per cent in June, higher than 8.85 per cent in May.

Experts said though inflation may remain high due to base effects in coming months, it is expected to soften with the impact of ease in global commodity prices amid fears of global recession. In June, however, the worrying trend as compared to May was that 15 commodity groups out of 23 commodity groups with combined weight of 70.82% in CPI basket witnessed higher inflation, India Ratings and Research said.

“With commodity prices having eased sharply on the back of a feared global recession, and the decline in vegetable and edible oil prices, the Indian retail inflation prints should soften below 7% in the coming months. However, the sequential momentum in services inflation remains a key monitorable, as high domestic demand is likely to create upward pressure on prices for this sector. We continue to foresee front loaded rate hikes of 60 bps spread over the next two policy reviews followed by an extended pause, as the MPC will focus on containing inflationary expectations without sacrificing growth,” Aditi Nayar, Chief Economist, ICRA, said.

In its other data release, the NSO’s industrial output grew to 19.6 per cent in May from 27.6 per cent a year ago. Industrial production had grown 27.6 per cent in May 2021 after a contraction of 33.4 per cent a year ago, when economic activity had been sharply affected in May 2020 due to the nationwide lockdown to limit the spread of the Covid-19 pandemic.

The manufacturing sector output, which accounts for more than three-fourths of the total weight of the Index of Industrial Production, rose 20.6 per cent in May compared with 5.8 per cent a month ago. Mining sector output rose to 10.9 per cent in May from 8.0 per cent in April, while electricity generation was up 23.5 per cent compared with 11.8 per cent a month ago.

“A significant pick up in IIP growth is indicative of ongoing economic recovery, but its sustainability is still not a given in view of raging inflation and adverse global geopolitical situation. A YoY growth in high single or double digit for at least 5-6 months may perhaps be required to believe that industrial growth is finally on a path of sustained recovery,” Sunil Kumar Sinha, Principal Economist, India Ratings and Research, said.