Headline Consumer Price Index (CPI) inflation in July might have risen only marginally and in line with expectations, but a closer look at the data suggests price pressures are becoming more broad-based, even if the pace remains gradual.
CPI inflation rose to a 19-month high of 4.45% in July, with food inflation at a series-high of 5.52% while core inflation remained steady at 3.9%.
“Overall, the July data reinforced our view that inflationary pressures are gradually broadening beyond food and fuel. However, the process remains measured rather than disruptive,” ANZ Banking Group economists Dhiraj Nim and Sanjay Mathur said.
“Sequential momentum is firmer, diffusion indicators are widening, and several gauges of underlying inflation continue to move higher. Yet the pace of firming remains measured, insufficient to warrant an immediate policy response, thereby allowing the Monetary Policy Committee (MPC) to remain patient for now,” Nim and Mathur said.
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Several measures point towards a broadening of inflation. Around 65% of the 358 items in the CPI basket saw higher inflation in July compared to June. The number of items with above 4% inflation has also risen in recent months. In July, 101 items had inflation above 4%, compared to just 65 items in January.
However, core inflation, which excludes food and fuel items, has remained at 3.9% for three consecutive months, suggesting that price pressures remain concentrated in food items. A decline in precious metal prices has also anchored core inflation.
Core inflation has been in a tight range of 3.7-3.9% since January despite witnessing signs of price pass-through at a sectoral level, QuantEco Research said. This is partly due to the “statistical salubrious effect” of the rate reduction in Goods and Services Tax in September last year, which will last for one more month, QuantEco economists said.
While core inflation remains steady, the underlying momentum has firmed up, economists said. On a 3-month over 3-month seasonally adjusted annualised rate basis, core CPI rose to 4.2% in July from 3.9% in June, Nim and Mathur noted.
Super core inflation—which is core inflation excluding precious metals—rose quicker than headline CPI inflation and core inflation in July. Super core inflation rose to 2.7% in July from 2.5% in June. While still benign, it was sharply higher than the 2.1% average seen in January-March.
According to Nim and Mathur, underlying price pressures in super core inflation are running higher than what is implied by annual rates.
RBI Governor Sanjay Malhotra last week said that core inflation excluding precious metals is expected to align with core inflation towards the end of the financial year. The central bank projects core inflation to average 4.3% in FY27.
“We expect this convergence between core and super core inflation to progress over the rest of the fiscal year also. Strong GDP growth continued high energy prices and rising food inflation should spill over to other parts of CPI even as base effects turn unfavourable,” economists at ICICI Securities Primary Dealership (I-SEC PD) said in a report.
While seasonality and higher restaurant services prices are major drivers of price gains on the super core inflation side, price pressures are also simmering in other goods categories, I-SEC PD said.
Even within food, inflation picked up across most food categories, led by protein items, spices, oils and fats, and fruits. CPI inflation excluding vegetables also rose in July.
The broadening of inflation is key, considering the headline print is expected to rise above 5% from October onwards. This projected rise in inflation is expected to push the RBI’s MPC to raise the repo rate by around 50 basis points by the end of FY27 from the current 5.25%.
TOPICSECONOMYinflationThis article was first uploaded on August thirteen, twenty twenty-six, at fifty-five minutes past eight in the night. © The Indian Express (P) Ltd