Inflation bouncing back

Inflation dragon is out yet again. Some call it the Ramazan effect; some say it is the rise in petroleum prices, GST. Whatever it is, the outcome is 10-month high CPI at 8.26 percent registered in July 13. Not a great start of the fiscal year then.
With an expected upward adjustment in electricity tariffs and northward moving oil prices, inflation is in no hurry to slow down despite Ramazan effect to fade away soon. A shift in monetary policy stance towards the hawkish side appears very much on the cards. The market may well pre-empt the same with slight increase in secondary market yields.
July recorded a 34-month high monthly inflation of 2.02 percent. The major culprit is none other than perishable food items which skyrocketed by 14.83 percent. Most likely, it is Ramazan that fuelled the prices of tomatoes (80 percent), potatoes (25 percent) and fresh fruits (14 percent). So there is a high likelihood of prices receding sooner than later.
Nonetheless, high CPI index doesn fully attribute to the month of blessings as in the previous six years average monthly CPI was at 1.4 percent during Ramazan. Hence, there is more to this two percent inflation in July.
People are busy buying new clothes and shoes for Eid resulting in 15 percent (YoY) increase in clothing and footwear sub-index. While the non-food giant housing, water, electricity, gas and fuels index shoot up by 1.87 percent in the month of July. The quarterly adjustment in housing rents explains it and the increase may continue in this index as sharp adjustment in electricity tariffs is due in October.
And the transport sector may register noticeable hike in fares in coming month as petrol prices increased by Rs2.73 per liter for August as compared to Rs1.2 per liter in July.
And the hike in money supply with foreign flows in negative and all the domestic flows concentrating into government borrowing ought to have its toll on non-food non-core inflation. Trend is visible as trimmed core inflation back to its northward journey with 7.8 percent increase in July vis-a-vis 6.8 percent in the previous month.
The days of low inflation may well be over.

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July CPI - Key items

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                              YoY (%)     MoM (%)

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General                          8.26        2.02

Food & bev                       8.94        2.72

Non-persishable                  6.90        0.68

Perishable                      20.92       14.83

Clothing & footwear             14.94        2.12

Housing, water, electricity      6.50        1.87

Transport                        5.74        0.84

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