Retail inflation expected to rise from September, core inflation may follow

Retail inflation, measured by the Consumer Price Index (CPI), remained below 4% in August but is anticipated to increase from September, with expectations that core inflation will also start to rise.

In August, retail inflation was at 3.65%, the second-highest level in five years, showing a slight increase from 3.6% in July. In comparison, the rate was significantly higher at 6.83% in August 2023. Food inflation, measured by the Consumer Food Price Index (CFPI), inched up to 5.66% in August from 5.44% in July, while it was 9.94% in August 2023.

The recent lower inflation is partly attributed to the high base effect from the previous year. However, specific food items continue to exhibit high inflation rates. For instance, cereals experienced 13.6% inflation in August, down from 14.77% in July; vegetables saw 10.71% inflation, up from 6.83% in July; fruits had 6.45% inflation, up from 3.84% in July; and eggs had 7.14% inflation, up from 6.76% in July.

Core inflation eased slightly to 3.4% in August, with personal care products experiencing a notable 7.9% inflation due to higher input costs.

Madan Sabnavis, Chief Economist at Bank of Baroda, noted, "While food inflation is expected to smoothen as the kharif crop comes in, core inflation may rise as input costs are embedded in prices, potentially moving towards the 4% mark." He also highlighted the risk of excess rains affecting crop prospects despite a generally good monsoon.

Aditi Nayar, Chief Economist and Head of Research and Outreach at ICRA, stated that with the base effect normalizing, CPI inflation is expected to rise to about 4.8% in September 2024 and range between 4.4% and 4.7% in the latter half of the fiscal year. "Although core-CPI inflation eased slightly to 3.5% in August 2024 from 3.6% in July 2024, we expect it to inch up through the rest of the fiscal due to demand for services and a year-on-year decline in cotton sowing," she said.

Rajani Sinha, Chief Economist at CareEdge, mentioned that the recent decrease in global crude oil and industrial metal prices has improved the CPI inflation outlook. However, she cautioned that the base effect will turn unfavorable in September due to an early festive season. "For FY25, we expect inflation to average 4.8%," she added.

As the economy moves forward, monitoring inflation trends and their underlying factors will be crucial to understanding the broader economic landscape.