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CPI inflation in July falls, but it can move up in the coming months

Wed Aug 14 2019

 

Increase in food prices, higher core inflation and volatility in crude prices can add upward pressure on inflation

 

The CPI inflation falling to 3.15 per cent in July from 3.18 per cent in June, on the back of moderation in food prices and fall in fuel prices, lends comfort no doubt. However, the trend over the past few months suggest a rise in food inflation led by significant rise in the prices of pulses, vegetables and meat.

 

Low base of last year, has started to exert upward pressure on food inflation, which is likely to continue in the coming months. What has been offering comfort to the overall CPI inflation is the fall in crude prices and moderating core inflation (excluding food and fuel). Both of these may need a watch in the coming months.

 

Rising global geo-political tensions could keep crude prices volatile. While a weak domestic demand and growth should keep core inflation — clothing, housing, health, transport and education — under check, the sudden rise in July, needs to be monitored.

 

After declining for seven consecutive months, core inflation went up to 4.3 per cent in July from 4.1 per cent in June, with some uptick in housing and transport communication. However, the fact that core inflation is still down from 6.3 per cent levels in July last year offers comfort.

Food basket

 

Food prices have a 45 per cent weight in CPI inflation.

 

Over the past year, the sharp fall in overall CPI inflation has been led by steep fall in food prices. Between November 2018 and February 2019, food inflation was negative — owing to a sharp fall in vegetable and pulse prices.

 

Since March this year, food inflation has been on the rise, with prices of pulses, vegetables and meat on shooting up. Low base effect and uneven distribution of monsoon (as highlighted by the RBI) could lead to higher food inflation in the coming months.

 

A look at the retail prices put out by the Department of Consumer Affairs, reveals that tomato prices have been on the rise since January. Between June and November last year, tomato prices fell by a steep 25-50 per cent, on this low base, tomato prices have been increasing by 40-100 per cent over the past few months.

 

Onion prices that also crashed last year, are still sedate. Potato, onion and tomato have the highest weightage in vegetable basket— any sharp increase can lead to higher vegetable inflation.

Crude uncertainty

 

From 7-8 per cent inflation in fuel and light between June to November last year, inflation in this basket has fallen sharply to 2-odd per cent.

 

In July, fuel and light reported a negative inflation of 0.36 per cent. Fall in crude prices have been offering a lot of comfort to the overall CPI inflation. Any sudden price rise owing to rising global tensions, can upset the apple cart.

 

What’s more, high core inflation which was a concern last year, hovering around 6 per cent levels has fallen sharply in recent months to 4-4.3 per cent.

 

Inflation in clothing, housing, health, transport and education has been trending lower over the past few months, suggesting rising growth concerns. The sudden uptick in July, would need monitoring in the coming months.

 

Source: Hindu business line.

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