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Home >Markets >Mark To Market >Drop in retail inflation is a comfort but some spoilers lie ahead

There seems to be good news on the inflation front. Retail inflation based on consumer price index (CPI) has dropped to a four-month low in August, primarily led by a fall in prices of vegetables.

If this trend continues, economists believe there is a chance for the average inflation to undershoot the Reserve Bank of India’s forecast.

Food inflation at 3.11% in August has been the lowest so far in 2021. Much of this has been driven by the sharp 11% fall in vegetable prices followed by that of fruits. In September, vegetable and cereal prices have remained soft, according to economists.

Food for thought
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Food for thought

“For the month of September, high-frequency data show more signs of moderation in cereals and vegetables prices, though pulses and edible oils continue to rise," said analysts at Barclays in a note.

This bodes well for inflation ahead. What seems to give more comfort is the softness in momentum of the prices of the items. Month-on-month comparisons show that price increases have slowed in most items and in some select categories prices have continued to fall.

Food inflation has the highest weight in the CPI and, therefore, much of the movement in the headline has often been dictated by food prices. Considering the subdued trend in food prices, analysts said the average headline inflation may undershoot the forecast of RBI.

“With August CPI showing a continued downward trend, we do not rule out a small downward revision in the Reserve Bank of India’s inflation estimates for FY21-22," said the Barclays report. The central bank has projected inflation at 5.70% for FY22.

But there are some niggling worries concerning inflation.

For food inflation to remain benign, some factors have to fall in place. While the outlook on the kharif output is sanguine, that of the rabi season depends heavily on reservoir levels. One worrying factor is the low reservoir levels this month.

Then there are onions. Onion prices have been surging of late and analysts at Crisil Ltd warn that there could be a 100% increase in prices this year. Erratic rainfall may hit onion harvest, they said in a report.

“The trend of the past two years shows untimely rains in August-September hampered onion harvest, and prices doubled compared with 2018, when conditions were normal," the report added.

Another critical component is the core inflation. Sure, core inflation has eased further in August and the momentum too has eased.

That said, the expected revival in demand for goods and services during the festive season is sure to push up prices. As such, core inflation has been sticky and above the headline print for 2021 so far.

Be that as it may, headline inflation may trend lower in the coming months because of a favourable base.

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