Retail inflation crosses 6% mark, at two year high of 6.07 per cent in July

imagesSource: Times of India, Aug 12, 2016

NEW DELHI: Retail inflation accelerated at a faster-than-expected pace to touch a two-year high in July, driven by costlier food. It also crossed the target set by the government earlier this month for consumer inflation.

The Consumer Price Index (CPI), the gauge of inflation at the retail level, rose to 6.07% in July, much above the Reserve Bank of India’s target of 5% by March 2017, presenting a big challenge for the new governor who will succeed Raghuram Rajan at the central bank next month.

The CPI was 5.77% in June, while the median analyst expectation for the current month was 5.9%. The rise rules out monetary easing any time soon, though most experts expect inflation to ease going ahead and an at least quarter percentage point reduction in interest rates in the rest of the financial year through March 2017.

The RBI left interest rates unchanged in its monetary policy review on August 9, the last under Rajan, citing risks to inflation.

Demand push from higher salaries to government employees could also lift inflation.

Economists though saw no reason for alarm, attributing the spike partly to the base effect of low inflation last year, and pinning hopes on the good monsoon to temper food prices. This year, the country is expecting record production of pulses, the prices of which have gone up steeply, going by higher area under the crop.

No nervousness is warranted out of headline inflation because the base effect has weighed in on numbers,” said Indranil Pan, chief economist at IDFC Bank.

“As for food, pulses stay high but on a more steady state scenario. Sugar and eggs have also been producing some upward surprises.”

Inflation at 6% is not a cause of worry and for any policy action, inflation has to go down for twothree months in a row, said Madan Sabnavis, chief economist at CARE Ratings.

Food inflation rose to 8.35% in July compared with 7.79% in June, led by a 27.5% increase in the prices of pulses. This is the fourth straight month of retail inflation being higher than the central bank’s target.

The government recently notified a 4% inflation target with a band of 2 percentage points on either side for the next five years for the proposed monetary policy committee, which will soon take charge of interest setting.

If consumer inflation exceeds these limits for three consecutive quarters, it will be considered a breach and the RBI will have to give reasons and suggest corrective measures.

Sugar and confectionery items were the second largest contributor to retail inflation as they became dearer by 21.91%. Vegetables were 14.06% more expensive in July. Clothing and footwear inflation was 5.23%. Fuel inflation was 2.75%.

“There is no arrival of any crop in August. That will be seen September onwards. Both retail and food inflation will remain in this range in August also,” Sabnavis said.

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