A sharp jump in the prices of vegetables drove up food costs and fanned consumer price inflation to its fastest pace in 22 months, government data released on Tuesday showed. The 5.77 per cent reading in June was marginally higher than May’s 5.76 per cent and compared with the 5.40 per cent in June 2015. The previous highest was 7.8 per cent in August 2014.
The data showing the acceleration in retail inflation comes less than a month ahead of the Reserve Bank of India’s bi-monthly monetary policy review on August 9, when Governor Raghuram Rajan will announce the last interest rate decision of his term before he leaves office in September.
The Centre is widely expected to name Rajan’s successor this month and the incoming RBI chief and a newly created Monetary Policy Committee will have their work cut out in taming price gains to meet the central bank’s March 2017 target of 5 per cent.
Transitional nature
“The latest (inflation) number is important from two perspectives,” said Richa Gupta, senior economist, Deloitte. “First, the number is being driven by food prices that are likely to be transitional in nature and should see some downward movement post-August when new supplies of vegetables hit the market.
“Second, core inflation has moved down slightly showing that there is little demand pressure in the system.
“Overall, the inflation trajectory will depend on how well the food supply is managed by the government in the coming months, ” Deloitte’s Gupta said.
Food inflation advanced to 7.79 per cent in June from a revised 7.47 per cent in May. Inflation in vegetables at 14.74 per cent (as against 10.77 per cent in May) was a significant contributor to the overall retail inflation, while the price rise in cereals and related products was 3.07 per cent (as against 2.59 per cent in May). The rate of price gains in pulses slowed to 26.86 per cent in June from 31.57 per cent in May.
According to the data, retail inflation in urban areas was 5.26 per cent in June, while in rural areas it was 6.2 per cent.
According to another set of data released by the statistics ministry, industrial output showed an uptick in May. The Index of Industrial Production (IIP) recorded a 1.2 percent year-on-year growth – helped by a six percent growth in the output of consumer durables such as washing machines, televisions and refrigerators.
IIP for April had shrunk by a revised (-) 1.34 per cent — the first contraction in industrial output in three months — while in March it registered just 0.05 per cent growth.
A. Didar Singh, secretary general of FICCI said, “Growth in manufacturing remains subdued and a cause for concern. The weak consumer and investment demand points to the fact that recovery is going to be slow in manufacturing and the need for addressing more deep rooted structural issues.” Manufacturing – accounting for more than 75 per cent of IIP — posted 0.7 per cent growth in May as against 2.1 per cent a year earlier. However, output in consumer non-durables shrank 2.2 per cent. In terms of industries, 14 of the 22 industry groups in the manufacturing sector showed positive growth in May compared with the corresponding month of the previous year. Power generation registered 4.7 per cent growth versus 6 per cent in May 2015.
Investment weakness
“The data shows that the weakness in investment persists,” said Rishi Shah, an economist at Deloitte.
“In particular, capital goods continued to contract for the seventh month highlighting that sentiment on investments picking up still remain weak. Going forward, industrial production is unlikely to see a quick turnaround.”