Retail inflation driven by high food prices hit 15 month-high of 7.44% in July; urban food inflation jumps to 12.32%

By: Yash Gupte

The rise in inflation was driven by a sudden increase in food inflation to 11.51 percent in July from 4.55 percent in June 2023, due to the high increase in the prices of items like cereals, pulses, milk and tomatoes.

India’s retail inflation which is measured by the Consumer Price Index (CPI), in July increased to a 15 month-high of 7.44 percent. The National Statistical Office (NSO) released the All India Consumer Price Index (CPI) and corresponding Consumer Food Price Index (CFPI) for July 2023. The rise in inflation was driven by a sudden increase in food inflation to 11.51 percent in July from 4.55 percent in June 2023, due to the high increase in the prices of items like cereals, pulses, milk and tomatoes. Consumer price index is used in calculating the retail inflation in the economy by tracking the changes in prices of most commonly used goods and services. This means that higher the CPI, higher the inflation which occurs due to the rise in prices of goods and services. The urban inflation also surged to 7.20 percent from 4.96 percent in June. A similar trend was witnessed in the case of rural inflation which climbed to 7.63 percent from 4.78 percent in June 2023.

The government has mandated the Reserve Bank of India to maintain the retail inflation at 4 percent with a margin of 2 percent on either side for a five-year period ending March 2026. The retail inflation has come down to its lowest level since December 2021. March has been the first month in the calendar year 2023 which has witnessed the CPI falling below the 6 percent mark. The inflation rate had last exceeded the 7 percent threshold in September 2022 and before that in April 2022 when it was recorded at 7.79 percent. Prior to September 2022 and when it was recorded at 7.79 percent in April 2022, the inflation rate had last exceeded the 7 percent threshold. This is the ninth time since July 2022 that the retail inflation rate has exceeded the upper bound of the 4+/- 2 percent band of the RBI's medium-term inflation target. When determining the benchmark interest rate, the RBI primarily considers the retail inflation rate.

The CPI is heavily weighted by the RBI while formulating its bi-monthly monetary policy. The repo rate was recently increased on February 08, 2023 by the Monetary Policy Committee (MPC) by 25 basis points (bps), bringing it to 6.50 percent. The MPC had increased the benchmark interest rate by 250 basis points in the fiscal year 2022-23 in an effort to control the raging inflation. The RBI increases the repo rate as a measure of tight monetary policy to counter inflation. Repo rate is the interest rate at which the central bank of a country lends money to commercial banks. In the event of inflation, central banks increase repo rate as this restricts the commercial banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in reducing inflation.

The Reserve Bank of India has put a hold to its repo rate hike spree. In its third bimonthly monetary policy meeting of FY24, the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) made the decision to maintain the repo rate at 6.5 percent. As per the MPC, the retail inflation in Q2 is estimated to remain at 6.2 percent, in Q3 at 5.7 percent and 5.2 percent in Q4.

Source: Ministry of Statistics and Programme Implementation

A substantial spike in vegetable prices during the month, combined with rising inflationary pressures in other food categories like cereals, pulses, spices, and milk, was the main factor driving inflation to a 15-month high. As a result, food and beverages share of overall inflation increased to 65 percent, a significant increase from the category's weight in the CPI basket.

In July, the Consumer Food Price Index (CFPI) reported inflation of 11.51 percent compared to 4.55 percent in June. Inflation rates for food and beverages, which make up 45.86 percent of the overall consumer price index (CPI), were 10.57 percent in July as compared to 4.63 percent in June. The inflation rate for goods and cereals (weight: 9.67 percent) grew to 13.04 percent year-over-year in July from 12.71 percent in June, while the inflation rate for vegetables (weight: 6.04 percent) soared to 37.34 percent from (-) 0.93 percent in June. Prices of vegetables like onions, peas, brinjal, garlic, tomatoes, and ginger have more than doubled in the last 2-3 months.

According to an estimate by ICRA, core inflation—the non-food, non-fuel segment—decelerated to a 21-month low of 5.1 percent in July 2023. Even while food inflation in rural regions was lower at 11.04 percent than in urban areas (12.32 percent), the overall retail inflation rate in July was higher in rural areas, at 7.63 percent than in urban areas at 7.20 percent. 12 of the 22 states and UTs for which data is available experienced higher-than-average retail inflation rates in July, with Rajasthan recording the highest rate (9.66 percent), followed by Jharkhand (9.16 percent), Tamil Nadu (8.95 percent), Odisha (8.67 percent), and Uttarakhand (8.58 percent).

Aditi Nayar, Chief Economist at ratings firm ICRA said, “The data for food prices for early August are not very promising, and we expect the headline CPI inflation to print above the 6.5% mark in August, before cooling off materially in September. While the vegetable price shock may not reverse adequately before the next harvest, rainfall has been deficient in August so far, which is likely to put upward pressure on food prices, amid the lags in kharif sowing across some crops.”

The retail inflation measured by the CPI came down below the mark of 6 percent in November for the first time in 2022. The fall in food prices and the implementation of the RBI’s tight monetary policy under which it has been increasing the repo rate had contributed in the decline in retail inflation in the month of November and December. But the trend was again reversed in the month of January 2023 as the retail inflation breached the mark of 6 percent and jumped to 6.52 percent. But in the month of March, the inflation declined to 5.66 percent, the lowest in 15 months and it further dropped to 4.25 percent in May, lowest in 25 months, before hitting 15 month high of 7.44 percent in July 2023.

Madan Sabnavis, Chief Economist at Bank of Baroda said, “In its latest credit policy, the Reserve Bank of India [RBI] said it will be ready to act if conditions warrant action. Would 7% inflation for two successive months cause the trigger to be pulled?”