High vegetable prices may have pushed retail inflation above 6% in July, say economists

Retail inflation is expected to have crossed the 6% mark in July after a gap of four months as prices of food articles, including perishables like tomatoes as well as non-perishables like cereals, increased. While official data on consumer price index (CPI)-based inflation for July will be released on August 14, higher-than-expected inflation is likely to be a key concern at the ongoing meeting of the Monetary Policy Committee of the Reserve Bank of India. 

RBI Governor Shaktikanta Das, who chairs the MPC, will announce the monetary policy statement on Thursday, where it is expected that the RBI will continue to hold policy rates. 

CPI inflation has remained within the RBI’s inflation mandate of 4% with a margin of 2% either side since March, when it eased to 5.66% and fell further to 4.31% in May. But as prices of vegetables surged, it rose marginally to 4.81% in June and it is expected to have risen further in July.  

Rahul Bajoria, MD and Head of EM Asia (ex-China) Economics at Barclays, says the agency expects the retail inflation rate to have accelerated markedly in July to 6.3% year-on-year. 

“The rise in headline was led by a surge in perishables food prices, amid slowing fuel inflation and flat core inflation. Sequentially, we expect CPI to rise 1.9% month on month, which would be the biggest jump since April 2020, when India went into its first round of lockdowns. We estimate food prices rose 3.4% month-on-month in July, which would also be on par with the rise in April 2020, and just modestly below the spike in food prices recorded in July 2014, when extreme weather pushed up vegetable prices,” he said in a note.  

Food items have a weighting of 46% in CPI, and within this, vegetables have a 6% weighting. 

Within food, the bulk of the increases is being seen in perishables, like vegetables, which, given the surge in tomato prices, may produce the highest sequential monthly print on record. Non-perishables in the food basket are also seeing higher prices, in particular cereals, pulses, and spices.  

SBI Ecowrap has pegged headline CPI inflation at 6.7% in July due to domestic food inflation. 

According to a BofA Global Research report, retail tomato prices have shot up 444% between June 1 and August 5. “Although its weight in CPI is only 0.6, this increase is likely to add 120 basis points to headline,” it said, adding that tomato, onion and potato together account for only 2.2% of headline CPI but contribute nearly 50% to the variance in headline inflation. 

In June, vegetables remained in deflationary territory it hardened significantly to -0.93% from -8.18% in May. Other food items also registered higher inflation with cereals (12.71%), eggs (7.03%), milk (8.56%), pulses (10.53%) and spices (19.19%) witnessing higher prices. Accordingly, the rise in consumer food price inflation was seen as broad based, which rose to 4.49% in June from 3% in May.  

CPI inflation is likely to rise to around 5.5% in July mainly due to spurt in prices of vegetables, milk, cereals and pulses, said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, adding that the single biggest contributor is the spurt in the price of tomatoes from Rs 26 per kg to around Rs 150 per kg now.  

The concern is that even as the spike in vegetable prices may be temporary due to flooding and unseasonal rains that damaged crops, other food items could remain costlier. “Cereal and pulses prices will continue to face pressure for some more time,” said Vijayakumar, adding that inadequate sowing in the North West and insufficient rain in the South and East are likely to impact the rice harvest.