Jul-21 retail inflation falls to 5.59% as food prices moderate

Clearly, the improving monsoons and the hopes of a normal Kharif tempered food prices in July.

Aug 13, 2021 08:08 IST India Infoline News Service

For the month of Jul-21, the actual CPI inflation at 5.59% came in 20 bps lower than consensus estimates. The street had pegged retail inflation in the range of 5.78%-5.80%. The sharp fall of 67 bps in retail inflation over Jun-21 from 6.26% to 5.59%, was largely driven by a sharp fall in food inflation to 3.96%. Clearly, the improving monsoons and the hopes of a normal Kharif tempered food prices in July.
Data Source: MOSPI

Food inflation in Jul-21 spiked fell sharply by 119 bps from 5.15% to 3.96%. However, this comes after 2 months of rapid spike in food prices and must be viewed in that perspective. In the previous month, we had highlighted how sticky fuel and transport inflation was having a secondary impact on all goods and services. Not much has changed on that front. Fuel inflation continues to be elevated at 12.38% while transport inflation is high at 10.54%. These two items have strong externalities, and that is a concern.

Jul-21 sees tapering in rural food inflation

In the month of Jun-21, food inflation and headline inflation had diverged for rural and urban consumers. In July, food inflation as well as general inflation were sharply lower for rural and urban consumers. However, with monsoons being the trigger for lower food prices, the impact was most visible in rural food inflation. Headline rural inflation tapered from 6.16% to 5.49% while rural food inflation fell sharply from 5.02% to 3.55%. A similar, but less pronounced, trend was visible in urban inflation. Urban food inflation tapered from 5.42% to 4.56% while the headline urban inflation also eased from 6.37% to 5.82%. In short, the real trigger for the fall in inflation in Jul-21 has been rural food inflation, which eased from improving rains.

If you break up rural food inflation, it is most pronounced in protein diets like eggs at 21.56%, oils & fats at 34.98%, fruits at 7.35% and meat & fish at 9.24%. Core inflation items like clothing, footwear and health services are also elevated in rural areas.

Core inflation tapers further to 5.97% in Jul-21

Since the core inflation peaked at around 6.40% in May-21, it has progressively tapered to 6.16% in June and further to 5.97% in July. While the base effect is moderating core inflation, the risk of downstream effects of high fuel and transport inflation is quite high.
Data Source: MOSPI / CEIC
Core inflation under 6% is a single data-point and, hence, not conclusive. Ideally, core inflation needs to be under 4% for the RBI to be able to maintain the 4% headline inflation target consistently. The steep levies on petrol and diesel are likely to be the single big risk factor for core inflation and headline inflation, with crude prices close to $70/bbl.

Promise of normal Kharif tapers food prices in Jul-21

After the euphoria of May and the delays of June, the monsoons are back to a pragmatic tangent in July. Rains have been delayed but the expectation is that the impact on Kharif output would be limited. That confidence had a sobering effect on food prices across categories, as is evident from overall food inflation tapering to 3.96%.

• Meat and fish inflation again spurted to 8.33% in Jul-21 compared to 4.83% in Jun-21, 9.03% in May-21 and 16.68% in Apr-21. Egg Inflation in Jul-21 was higher at 20.82% compared to 19.35% in Jun-21.

• Fruits inflation tapered to 8.91% in Jul-21 compared to 11.82% in Jun-21, 11.98% in May-21 and 9.81% in Apr-21. Vegetable inflation dipped sharply to (-10.58%) in Jul-21 compared to (-0.70%) in Jun-21, (-1.92%) in May-21 and (-14.18%) in Apr-21. Clearly, vegetable inflation appears to have driven overall food inflation sharply lower.

• Pulses inflation moderated to 9.04% in Jul-21 compared to 10.01% in Jun-21, 9.39% in May-21 and 7.51% in Apr-21. Cereals inflation stayed in negative at (-1.75%) in Jul-21 compared to (-1.94%) in Jun-21. Sugar inflation dipped back to negative at (-0.52%) in Jul-21, compared to 0.79% in Jun-21.

The big influence on food inflation appears to be deeply negative vegetable inflation.

Downstream effect must be the focus of government

Will lower inflation have a positive inflation on RBI policy. The RBI has already spelt out that rates will stay low and liquidity comfortable till growth normalizes. That looks some time away, so the immediate risk to rates is the Fed raising rates; not domestic inflation. However, the government must be cautious about the downstream effect.

We had highlighted over last 2 months that fuel and transport inflation could be double-edged swords. At current double-digit levels, they are not sustainable. Fuel inflation and transport inflation have strong downstream effects and that is likely to put pressure on core inflation and food inflation. The earlier the government comes up with an out-of-the-box solution, the better it would be. Once the Fed starts hiking rates and tightening liquidity, Indian economy may find itself short of options.

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