CPI inflation surge: 'TOP' price variation chief cause; likey to touch 5.5% in July, say economists

With headline inflation slightly increased sequentially to 4.81% in June 2023 as compared to 4.31% in May, the country's CPI inflation remains “sketchy”, with 6% in August only a tail event, but with positive core cues, SBI Research says in its latest commentary on latest inflation numbers.

The research wing, in its latest report, says though retail inflation remains within the tolerance range of the RBI for the fourth consecutive month, continued vigil on the evolving inflation outlook is warranted given the "erratic" progress of monsoon and its impact on Kharif sowing and subsequently on pulse inflation.

"Analysing volatility in vegetable prices, tomato, onion and potato (TOP) form the staples in Indian kitchen and their price variation is the chief cause of volatility in the vegetable/food inflation," writes Soumya Kanti Ghosh, group chief economic adviser, SBI Research.

He writes that if tomato prices increase without any substantial change in potato and onion, then average inflation in Q2 FY24 will come near 5.8% YoY, but if the TOP inflation increases, then CPI might come to around 6.0% YoY in Q2 FY24. “Accordingly, average CPI for FY24 will vary between 5.2%-5.4%.”

Unofficial data shows that totamo prices in Delhi's Azadpur wholesale market have surged 1,315% between June 2 and July 3 -- a sharp variation from ₹451/quintal to ₹6,381 per quintal during the said period. Similar kinds of trends are being seen for oninion and potato, too.

To see the price cycles of cereals and pulses, the monthly inflation data of cereals and pulses were analysed from January 2012 to June 2023. "The results indicate that in an increasing price cycle, cereals continue to rise on an average for 20 months and pulses for 19 months. While in a declining price cycle, cereals prices decline continuously for 15 months and pulses by 21 months."

Currently, cereals prices are on a declining trend, while pulse prices are on an increasing trend. "It is thus crucial to mitigate the increase in pulse prices through government intervention."

Ratings agency ICRA says a less supportive base and the onset of the "spike in vegetable prices" pushed up the headline CPI inflation to a higher-than-expected 4.8% in June 2023 against its expectation of 4.7%. "Amidst the ongoing excess rainfall in North India, the surge in the prices of perishables, particularly vegetables, is likely to harden the food inflation further in the immediate term. Besides, the impact of El Nino on monsoons and sowing in India needs to be carefully monitored," says the ratings agency.

Based on the early trends for the prices of essential commodities, the CPI inflation is projected to rise to an uncomfortable 5.3-5.5% in July 2023. ICRA expects the vegetable price shock to result in the Q2 FY2024 CPI inflation exceeding the Monetary Policy Committee’s last forecast of 5.2%.

“Accordingly, we anticipate the committee will retain its hawkish tone in August 2023 keep the repo rate unchanged and signal that a pivot to rate cuts remains distant,” the agency adds.

Notably, the CPI inflation saw an uptick to 4.8% in June 2023 from a 25-month low of 4.3% in May 2023, while remaining below the MPC’s 6.0% upper threshold of the 2.6% medium-term target for the fourth consecutive month.