Retail inflation inches up to 3.65% in August on account of rise in food prices

Data released separately showed the country’s factory output for July, as measured by the Index of Industrial Production (IIP), inched higher to 4.8 per cent from a five-month low of 4.7 per cent primarily led by growth in manufacturing output.

Headline retail inflation rate was initially estimated at 3.54 per cent in July, which has now been revised up to 3.60 per cent. The rise in inflation rate to 3.65 per cent in August mainly came on the back of a rise in food and beverages inflation to 5.30 per cent from 5.06 per cent in July. While core inflation — non-food, non-fuel segment — remained steady at 3.4 per cent, services inflation within it shot up to an eight-month high of 3.4 per cent suggesting revival in services demand. Within core, personal care products recorded inflation of 7.9 per cent mainly due to higher input costs.

Cereals, eggs, pulses, fruits had inflation rates above 6 per cent each in July, while pulses and vegetables recorded double-digit inflation of 13.6 per cent and 10.71 per cent, respectively. With over 40 per cent of items still having inflation above 4 per cent and with the waning favourable base effect amid uneven distribution of monsoon rainfall, headline inflation rate is seen rising further in September to 4.8-5 per cent mark, economists said.

“The positive effects of better kharif sowing would be visible only post-harvest, that is, October 2024 onwards. Till that time, pulses inflation is expected to remain in double-digits and cereals inflation would also be above 6 per cent. With the favourable base effect subsiding, retail inflation is expected to head closer to the 5 per cent mark in September 2024, mainly due to food & beverages inflation. The core inflation in September 2024 is expected to inch up to 3.5 per cent. Ind-Ra does not expect any change in policy rates/stance in FY25, based on current inflationary and growth trends,” Paras Jasrai, Senior Economic Analyst, India Ratings & Research said.

Last week, RBI Governor Shaktikanta Das had said that while steps taken by the central bank along with supply-side measures by the government and cooling global commodity prices had brought down inflation, he flagged concerns over the pace of disinflation getting frequently interrupted by volatile and elevated food inflation. “We have to remain watchful of how the forces impacting inflation play out. The balance between inflation and growth is well-poised. We must successfully navigate the last mile of disinflation, and preserve the credibility of the flexible inflation targeting (FIT) framework which is a major structural reform,” he said.

The RBI had kept the repo rate unchanged for the ninth time in a row in August. The retail inflation surge is mainly triggered by higher food inflation, with food and beverages carrying a weight of around 46 per cent in the CPI.

Next week, the US Fed is expected to start cutting rates with an expected quarter-of-a-percentage-point reduction. This could act as a lead for the India’s central bank to also look towards the rate cut trajectory.

“While food inflation will smoothen as the kharif crop comes in, we expect core inflation to stiffen as input costs get embedded in prices. This category would move up towards the 4 per cent mark…we believe December will be the earliest point for considering any change in policy. The monsoon has been good but the risk factor of excess rains affecting crop prospects is something to be monitored,” Madan Sabnavis, Chief Economist, Bank of Baroda, said.

Rural food inflation rose to 6.02 per cent in August from 5.89 per cent in July, while urban food inflation increased to 4.99 per cent from 4.63 per cent. Statewise inflation data showed that 7 of the 22 major states/UTs registered inflation over the headline rate of 3.65 per cent, with Bihar having the highest inflation rate of 6.62 per cent and Telangana having the lowest inflation rate of 2.02 per cent.

India’s factory output, as measured by the Index of Industrial Production (IIP), rose to 4.8 per cent from a five-month low of 4.7 per cent primarily led by growth in manufacturing output. Manufacturing, which accounts for 77.6 per cent of the weight of the IIP, increased to 4.6 per cent in July from 3.2 per cent in the previous month but was lower than 5.3 per cent growth seen in June 2023.

The overall industrial output had recorded a growth of 6.2 per cent in July 2023. Cumulatively so far in the financial year 2024-25, industrial growth has been recorded at 5.2 per cent during April-July as against 5.1 per cent in the previous financial year.

Mining output growth slowed to 3.7 per cent in July from 10.3 per cent in June and 10.7 per cent in the year-ago period. Electricity output also slowed to 7.9 per cent in July from 8.6 per cent in June and 8.0 per cent in the year-ago period. On the basis of use-base classification, the capital goods segment, a key indicator of the investment sentiment, showed growth of 12.0 per cent in July as against 3.8 per cent in June and 5.1 per cent in the year-ago period.

As per the IIP data, 18 out of the 23 sectors in manufacturing registered growth in July, with manufacture of electrical equipment, other transport equipments, and tobacco products among the highest growing sectors, and other manufacturing, pharmaceuticals, recorded media, paper and food products amongst the significant non-performers.
“The moderation in growth of electricity and mining sectors was balanced by an acceleration in the manufacturing sector. Consumption-related segments painted a mixed picture, as output of consumer durables grew by 8.2 per cent, while non-durables output remained in the contractionary zone, falling by 4.4 per cent. An improvement in kharif sowing amidst a good monsoon bodes well for the private consumption demand. Overall, a sustained and meaningful improvement in consumption and private capex remains critical for the performance of industrial activity,” Rajani Sinha, Chief Economist, CareEdge Ratings said.