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CPI inflation stayed strikingly similar to previous month at 8.35 percent, with an ever-narrowing urban-rural gap. Year-on-year food inflation for the second month running stayed in single digit, but much should not be made of it, as food prices are coming from a high base. The non-perishable food price inflation is still in double digits and that the high base effect is likely to continue for a few more months.

Heavyweight non-perishable food items such as wheat, sugar, cooking oil and ghee are all up in double digits, with only wheat showing signs of slowing down on month-on-month basis. Sugar, oil, and ghee all saw prices go up by more than 5 percent month-on-month. In case of cooking oil and ghee, global commodity price spiral is in play, as palm oil prices have jacked up by more than 40 percent year-on-year.

The thing with non-perishable food items is that they almost never go down even if the global commodity price softens. The rate of increase may be arrested once normalcy resumes in palm oil, but the high base has been formed, and will likely keep year-on-year increase well within double digits. The case of sugar is no different, no matter how much effort you make to administer prices through DCs – very rarely do sugar prices go back at the retail level.

On the perishable front, cyclicity is the norm except for milk prices. Milk has the single highest weight in the CPI food consumption basket – and the upward trend suggests double-digit increase in milk prices is almost guaranteed. Milk prices had risen by an average 6 percent year-on-year from FY13 to FY20, before FY21 came with a 12 percent year-on-year increase. That trend seems to have cemented its place, which will keep the perishable food basket under pressure.

While there may be early signs of demand picking up, it is nowhere near to cause demand driven inflation, as evident from core inflation. Non-food non-energy core inflation has come down to 6.3 percent, having hit 7 percent as recent as April 2021. Given the government’s mood and adequate budgeting for power sector subsidies, an increase in electricity or gas prices for the domestic sector appears highly unlikely, which will lead to further curbed core inflation once the high base of previous electricity tariff increase eases.

The petroleum prices will continue to reflect double-digit year-on-year increase for a few more months, but the month-on-month increase will be close to minimal. The government has clearly adopted the strategy of letting petroleum revenues go, in a bid to minimize the impact on consumers. Any slowdown in global crude oil prices could reflect positively on fuel inflation going forward.

That said, the risks from currency depreciation are growing, which could fuel inflation. Similarly, possible fiscal slippages could lead to another round of indirect inflation, as the government would need to finance the gap. But for now, as long as demand driven inflation is kept in check, the central bank may want to continue running negative real interest rates. It is too early to call, but FY22 CPI could well fall within or near the higher range of projected 6-8 percent.


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