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NEW DELHI : While retail inflation is at record levels with most products reporting double-digit rise, the services sector saw a decline in inflation rates in May compared to the beginning of the year.

Consumer price index data showed most services such as beauticians, private tutors, coaching centres, hotels, photography, internet, cable TV charges, rickshaw fare, conveyance, medical and hospital charges, have reported a moderation in inflation rates during May compared to January.

This could be due to several factors, including a lag effect of goods inflation being passed on to the services sector. Besides, with demand picking up now, service providers may be cautious in passing on cost pressures to clients to remain competitive after two years of the pandemic. The high inflation base of certain services may have also contributed to the drop from a year earlier.

Barber and beautician services have seen inflation ease from 5.6% in January to 4.3% in May. Private tutor and coaching centres eased from 3.92% to 1.95%. Hotel lodging charges declined sharply from 12.3% to 0.06% during the period. Rickshaw fare inflation eased from 4.5% to 0.44%. Non- institutional medical expenses inflation moderated from 5.75% to 4.5%, and domestic help and cook category saw inflation ease from 9.38% to 7.49%, the segmented CPI data by National Statistical Office showed. Consequently, overall CPI inflation in May cooled from an eight-year high of 7.79% in April to 7.04% in May.

“The lower-than-expected momentum of services inflation was a relief, as we had expected the higher demand to enable a faster transmission to this segment. Nevertheless, we remain watchful of how the trends evolve in this segment, as higher service inflation will translate into a sticky core inflation," said Aditi Nayar, chief economist, ICRA Ratings. For certain services, improved demand may have generated higher supply as well, to help keep prices in check, while for others, the base effect may be at play, she added.

For most goods, inflation hardened since January, touching double-digit levels in May.

Madan Sabnavis, chief economist, Bank of Baroda, said inflation moderation in some services may not be sustainable and could be due to ‘teaser prices’ being offered as businesses opened up after the pandemic.“ services have opened up fully post January, there has been a tendency to hold back from increasing charges lest it deter users…Normally it is the ‘teaser prices’ which are offered once a service comes back into operation post the lockdown, which can be withdrawn any time."

For some services, the moderation in inflation could be a result of a high base effect, said Sabnavis. “For example, the health services index peaked in May last year when the second wave was in. Therefore, the numbers look lower now. It is not to say that health services are becoming cheaper as these rates are never reduced."

The exceptions in services reporting high inflation in May were school fees, cinemas, and monthly maintenance charges. This could be attributed to the services opening up recently without any price changes in the last two years of covid-19. Schools opened for physical classes in April after a two-year gap. Cinema halls also opened in full capacity after the Omicron wave receded.

Inflation in school and college tuition fees rose from 2.89% in January to 4.19% in May. The rate of price rise in new movie releases on a normal day shot up from 8.98% to 15.63% during the period. Similarly, monthly maintenance charges inflation grew from 3.27% in January to 12.95% in May.

Devendra Kumar Pant, chief economist, India Ratings, said services which opened up earlier like beauty services, private tuitions, etc., are seeing a moderation in inflation after seeing some price increases in the past year.

“Though the economy started opening up from 2021, some of the contact intensive services such as educational institutions started opening up for physical classes from early 2022. Most of the institutions froze the fees in 2020 and 2021 and started revising the fees only after they opened for physical classes; as a result, retail inflation for it is high compared to services that opened earlier. Higher inflation for services that opened recently will continue for at least another six months," said Pant.

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