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Inflation sticky but off 15-month high, factory output shows uptick

India’s retail inflation rate eased to 6.83 per cent in August from a 15-month high of 7.44 per cent in July 2023, mainly due to a slide in prices of food items, especially vegetables, data released by the National Statistical Office (NSO) Tuesday showed. The inflation print, however, continued to remain above the upper limit of the 4+/- 2 per cent band of Reserve Bank of India’s medium-term inflation target, making it the fourth instance of headline inflation staying higher than the upper limit of the target during this calendar year and the seventh such instance since August 2022.

Meanwhile, factory output grew to a five-month high of 5.7 per cent in July due to strong performance of manufacturing, mining and electricity sectors, separately released data by NSO showed.

Manufacturing, which accounts for 77.6 percent of the weight of the IIP, grew by 4.6 per cent in July as against 3.1 per cent each in the year-ago period and month ago. Mining and electricity output grew at 10.7 per cent and 8 per cent, respectively.

On the retail inflation front, which is tracked closely by the RBI for monetary policy, vegetables inflation provided some relief by moderating to 26.14 per cent in August from 37.34 per cent in July, while cereals and products inflation also eased to 11.85 per cent from 13.04 per cent in the previous month.

The retail inflation rate in August was 13.04 per cent in case of pulses and products, 7.73 per cent for milk and products, 23.19 per cent for spices, 5.31 per cent for prepared meals, snacks, sweets etc., and (-)15.28 per cent for oils and fats.


Red flags going forward

The decline in August 2023 retail inflation was on account of a sharp moderation in vegetable prices, but households will continue to face high food inflation on account of items such as cereals, milk pulses and spices, which could impact consumption demand going forward.

The Consumer Food Price Index (CFPI) recorded an inflation rate of 9.94 per cent in August as against 11.51 per cent in July and 7.62 per cent a year ago.

Food and beverages, which accounts for 45.86 per cent of the overall consumer price index (CPI), recorded an inflation rate of 9.19 per cent in August as against 10.57 per cent in July. Core inflation — the non-food, non-fuel segment — eased to 4.9 per cent in August 2023, as per estimate by CareEdge Ratings.

The overall retail inflation rate in August was higher at 7.02 per cent in rural areas than 6.59 per cent in urban areas, even though food inflation for rural areas was at 9.67 per cent, lower than 10.42 per cent in urban areas.

Data for 22 major states/UTs shared by NSO showed 13 states recorded higher-than-average retail inflation rate in August, with the highest inflation rate seen in Rajasthan (8.6 per cent), followed by Telangana and Haryana (8.27 per cent each), Odisha (8.23 per cent) and Jharkhand (7.91 per cent).

High inflation is being seen as a concern by policymakers. RBI Governor Shaktikanta Das last week had said the recurring food price shocks pose a risk to anchoring inflation expectations.

In its monetary policy review last month, the RBI had kept the key repo rate unchanged at 6.50 per cent but had hiked the inflation projection from 5.1 per cent to 5.4 per cent for FY2024.

As per the RBI projection, inflation is expected to remain above 5 per cent till the first quarter of 2024-25 and is likely to hit the 6.2 per cent level in the ongoing quarter (July-September).

Experts said though inflation is expected to rise further, the impact of deflation at the wholesale level may provide relief with a lag at retail level. “While overall food inflation has moderated, the worrying aspect is that the sequential upward momentum has continued for some food items like cereals, pulses and milk. There is risk of further upward pressure on food inflation given the skewed rainfall and low reservoir levels. The recent spike in global crude oil prices is also concerning. However, a comforting factor is that the continued deflation in WPI will have a lagged impact on CPI inflation going forward. While RBI will remain cautious, we expect an extended pause in policy rates in 2023,” said Rajani Sinha, Chief Economist, CareEdge Ratings.


Red flags going forward

The decline in August 2023 retail inflation was on account of a sharp moderation in vegetable prices, but households will continue to face high food inflation on account of items such as cereals, milk pulses and spices, which could impact consumption demand going forward.

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In the Index of Industrial Production (IIP), manufacturing in absolute terms improved to 141.2 in July from 135 a year ago and 141.1 in the previous month. As per the IIP data, nine out of the 23 sectors in manufacturing registered a contraction in July, with apparel, computer and electronics amongst the significant non-performers, while pharmaceuticals and basic metals did better.

In terms of the use-based industries, infrastructure goods output grew 11.4 per cent in July while consumer non-durables output grew sharply by 7.4 per cent. However, consumer durables output continued to be in the negative territory for the second straight month at (-) 2.7 per cent. Since July 2022, consumer durables has slipped into negative territory in 10 months.

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“The healthy growth in consumer non-durables segment is a welcome change as households, especially belonging to the lower income bracket have been facing the brunt of high inflation. The robust growth in infrastructure goods continued to get strong support from the government capex spending (union plus 23 states)… The worrisome area is the contraction of 2.7% yoy in consumer durables in July 2023 and reflective of the weakness and skewness in consumption demand,” said a note by India Ratings’ Principal Economist Sunil Kumar Sinha and Senior Analyst Paras Jasrai.

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