Proactive steps have cooled inflation but concerns remain
Monetary policy intervention and macroeconomic factors seem to work as retail inflation cooled to a 25-month low in May. The good news from the National Statistical Office is the consumer price index-based inflation rate eased to 4.25% in May, as against 4.70% the previous month. Inflation levels have, therefore, stayed below the upper tolerance limit of 6% for the third consecutive month this year. The scenario seemed brighter than it is as the comparison is with a base of one year ago, May 2022, when retail inflation was over 7%. However, the easing of food prices to 2.91%, driven by cereals, vegetables, meat and fish prices, also had a salutary impact.
However, a closer look at the data showed little room for complacency. While the current inflation rate has eased compared to the year-ago figures, the month-on-month prices continue to inch up, with the CPI rising 0.51% for the second month. The food price index month-on-month was also up 0.7% compared to 0.6% in April this year. Meanwhile, though food prices have eased, inflationary pressure could be seen in household goods, personal care, and health products, which showed inflation rates of over 6%—a signal that consumer goods companies were passing on input costs to consumers.
It must be remembered that though India has done well compared to advanced countries like the Eurozone and the UK, where retail inflation is logging over 6%, our inflation rate is much higher than the rate prevailing among the BRICS nations—China logged only 0.2%, Brazil 3.9% and Russia 3.2%. There is also some nervousness about the possible impact of the delayed monsoon and the El Nino effect that has made rain cycles unpredictable. Though a bumper 112 million-tonne wheat harvest is expected, any disruption of sowing and harvesting operations will likely seriously impact food inflation. In that respect, the government, for the first time in 15 years, has clamped limits on traders’ holding of wheat stocks and large retail chains till March 31, 2024, to ensure prices remain in check. These positive trends have ensured the increase in interest rates has been paused for some time by the Reserve Bank’s monetary policy committee. Still, the concerns of the underlying inflationary pressures will also ensure no easing of the rates over the next few bi-monthly cycles till March 31, 2024.