August headline inflation eased to a 4-month low of 5.3% (vs 5.6% in July), better than the consensus estimates. In backdrop of one-off rise across-board in May inflation (probably driven by rural inflation), last three consecutive months print (lower than consensus print) indicates normalization/mean-revert. Improving supply chain, minimal restrictions on movement and better supply management (especially food) has helped in keeping price momentum down.
Overall, inflation staying below the upper tolerance limit of RBI’s target inflation (6%) for the second consecutive month bodes well for RBI’s accommodative stance and growth focused policy. However, we must note that economy is now at pre-covid levels and therefore RBI may take a cautious tone. For the rest of FY22, consensus expectation is that the Monetary Policy Committee (MPC) will maintain status quo in benchmark policy rates.
What has caused the inflation to trend down or up ?
- Food: There has been a broad-based moderation in food and beverages driven by:
- Lower than seasonality increase in vegetables, milk, spices, prepared meals, pan tobacco;
- Deflation in cereals, meat, eggs, fruit and pulses (improved supply). Only concern, edible oil, sugar prices.
- Clothing: Clothing and footwear prices have been rising over last couple of months on rising cost of production.
- Housing: Continued to rise lower than seasonality (as the trend has been evident over last couple of months.
- Fuel Prices: Fuel prices rose primarily on account of sharp rise in LPG prices (global cues) and kerosene.
- Services: Even the momentum in services came down on lower petrol, diesel and education and health prices and deflation in gold prices. That said, core inflation is expected to remain sticky at higher levels on account of rising cost of production, pass-through of prices (on pick-up in demand).
