Inflation hits 4-month high on firm fuel prices

CPI rises to 4.87% in May on costlier food items

Retail inflation jumped to four-month high of 4.87 per cent in May on costlier food items such as fruits, vegetables and cereals coupled with high fuel rates and weak rupee, strengthening views that the Reserve Bank of India could raise interest rates again in August.

Based on Consumer Price Index (CPI), the retail inflation was at 4.58 per cent in the preceding month, April. In May 2017, however, it was at a low of 2.18 per cent.

The previous high in retail inflation was in January this year at 5.7 per cent. The overall consumer food price index shot up to 3.10 per cent in May, from 2.80 per cent in April, as per the Central Statistics Office.

“Inflationary pressures are building up in the economy,” said Tushar Arora, senior economist at HDFC Bank. “The possibility of one more rate hike cannot be ruled out this year.”

May was the seventh straight month in which inflation was higher than the RBI’s medium-term target of 4 percent.

The RBI has revised the first half inflation projection to 4.8-4.9 per cent in the current fiscal, and 4.7 per cent in the second half -- including the HRA impact of central government employees.

In its latest policy review earlier this month, the RBI raised the repo rate -- at which it lends to banks -- by 0.25 per cent to 6.25 per cent, the first hike in more than four years due to growing concerns about inflation stoked by rising global crude oil prices as well as domestic price increases.

Excluding, the HRA revisions, the CPI inflation is projected at 4.6 per cent in first half (April-September) and 4.7 per cent in second half (October-March). Fruit prices grew at a faster pace of 12.33 per cent in May as against 9.65 per cent in April, while vegetables were costlier by 8.04 per cent (from 7.29 per cent month ago).

RBI had said the decision of the Monetary Policy Committee to hike the rate was consistent with the neutral stance and in consonance with the objective of achieving the medium-term target for CPI inflation of 4 per cent within a band of (+/-) 2 per cent, while supporting growth. Oil is the country’s biggest import and an increase in oil prices raise push inflation up and widen the trade deficit, putting pressure on the rupee. So far in 2018, retail prices of petrol have climbed 9.2 per cent and diesel by 13.7 per cent in the capital, Delhi.

The rupee has depreciated 5.3 per cent since Jan. 1, pushing up the prices of imported items such as electronic goods and machinery.

However, annual retail food inflation, which contributes about half of the weight in the CPI index, remained muted, helped by forecast of normal rains this year.