Retail inflation eases to 5-month low in Sept

NEW DELHI: Retail inflation eased to 4.35% in September from 5.3% in the previous month, and factory output rose 11.9% in August compared to a year-ago, highlighting a return of industrial activity to pre-pandemic levels and providing some headroom to the Reserve Bank of India to keep interest rates low for longer to boost growth in an economy hit hard by the Covid-19 pandemic.

September is the third consecutive month that the Consumer Price Index has stayed below 6%, the upper tolerance limit set by the central bank for the medium term. The moderation was driven by lower food prices. The less volatile core inflation, which comprises non-food and non-fuel components, remained high at 6%.

On the factory output front, August’s Index of Industrial Production was also 3.9% higher than August 2019. All but one of the five categories of products covered by the index saw an increase in output compared to August 2019.

The latest inflation numbers are slightly lower than expected. A Bloomberg poll of 35 economists projected retail inflation growth at 4.5%.

The headline inflation number hides a divergent price pattern. While food inflation declined from 3.11%in August to 0.68% in September, nonfood inflation increased marginally from 6.75% to 6.83%. Food inflation accounts for 39% of the CPI basket.

The mismatch between price trajectories for food and nonfood items has been persisting for the past few months. While food inflation has fallen continuously from 5.15% in June to 0.68% in September, non-food inflation has been close to 7% in each of these months.

Not all food prices are moderating. Although vegetable prices have fallen by 24.5 % on an annual basis, edible oil prices increased by 37% in the same period.

Because fuel prices have rising at a fast rate – prices in the fuel and light category grew at 13.6 % in September – core inflation at 6% is slightly lower than non-food inflation. As fuel prices continue to increase on account of rising crude oil prices and a falling rupee against the dollar, fuel inflation and its cascading effect are expected to increase.

The latest inflation numbers are in keeping with the projections by the monetary policy committee of the Reserve Bank, which fixes the benchmark interest rate.