Inflation eases, supported by softness in food prices

The CPI based inflation eased marginally and was reported at 6.71% for the month of Jul’22, as compared to 7.01% in the preceding month, and 5.59% during the year ago period. The easing of food inflation was the key contributor to the softening of headline inflation. Core inflation too witnessed a move similar to the headline numbers.

The Consumer Food Price (CFP) inflation eased for the third month in a row and was reported at 6.75% for the month of Jul’22 as compared to 7.75% for the month of Jun’22. The food basket continued to lose momentum, as was indicated by the month-on-month gains in food prices. The components of food basket that witnessed easing of price pressures were Meat & Fish, Egg, Milk Products and Oils & Fats. The sharpest downward movement was reported in Vegetables prices. The components of the food basket that reported continued inflationary pressures were Cereals, Fruits and Spices. The easing of commodity prices globally may provide a short-term relief from further gains in domestic food prices. The inflation for Clothing, Fuel & Light, Housing and Miscellaneous was reported at 9.91%, 11.76%, 3.90% and 5.91% respectively.

Fuel Price
Brent has eased from its highs and is now trading closer to $94 per barrel; there are multiple factors at play for this recent slump in prices. First, the US Dollar was becoming stronger and naturally the Dollar strength needed to get reflected in the oil price. Second factor is that the demand for oil from the two major consumers that is China and India has been gradually coming down. The demand for Russian oil by these two countries account for almost half of all oil sales by Russia. The “zero covid policy” of China and its impact were visible on the latest economic data coming out of the country. China in a surprise move lowered its lending rates to support the economy. The weakness in growth data of major oil consumers and the strength of USD may keep a cap on any gains in oil prices.

Core Inflation
Core CPI is at 5.79% in July, as against 5.96% in the preceding month. This indicates some reduction in price pressures but not very significant. Even as the demand is expected to slowdown in the wake of rising interest rates, the inflation figures for healthcare, education, personal care and effects and recreation and amusement remain robust and they may have the effect of keeping the core number more sticky.

Inflationary pressures may have moderated, but the headline inflation number is outside the RBI’s targeted range for seven months in a row and risks continue to be on the upside. This would imply the need to keep the pressure on inflation through rate action by the central bank till prices fall and settle within the target ranges. While monsoon season has progressed satisfactorily, the flooding like situation in few geographies may lead to temporary price spikes that would negatively impact the recent trend of easing momentum in gains of food prices.
The other critical factor that may have a bearing on interest rate decisions of the RBI are the policy decisions of the developed markets, especially the US. The latest CPI inflation data for US was reported at 8.5% as compared to 9.1% in the preceding month, largely influenced by the fall in energy prices. The street expectations reflect the sentiment that the inflation may have peaked in US, but the critical thing to note is that even after moderation the latest headline inflation is higher by 650 basis points from the Fed’s targeted level. The US Fed may have to continue with rate hikes for the rest of the year to effectively curb demand and bring inflation closer to 2% level.

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