CPI inflation surges beyond national average in 12 states for June

The Consumer Price Index (CPI)-based inflation for June 2024 has underscored the ongoing challenges in the disinflation process, as highlighted by the Reserve Bank of India (RBI).

The CPI data released by the government on 12 July, revealing that consumer inflation stood at a four-month high of 5.08 per cent. The core inflation rate, which excludes food and energy prices, remained steady at 3.1 per cent.

The CPI measures retail inflation by tracking the price changes of commonly consumed goods and services, including food, housing, apparel, transportation, electronics, medical care, and education.

Despite the average CPI inflation being 5.08 per cent in June, 12 out of the 22 states and union territories reviewed experienced significantly higher inflation rates.

States such as Andhra Pradesh, Assam, Bihar, Odisha, Haryana, Karnataka, and Telangana reported inflation rates exceeding 5.08 per cent. Odisha had the highest CPI inflation at 7.22 per cent, followed by Bihar at 6.37 per cent, Karnataka at 5.98 per cent, Andhra Pradesh at 5.87 per cent, and Rajasthan at 5.83 per cent.

June's CPI inflation was primarily driven by food prices, which surged by 9.4 per cent due to increased costs of vegetables, cereals, milk, and fruits. Vegetable inflation has remained in double digits for eight consecutive months, posing a major concern along with the persistent high prices of food grains.

Although the deficient rainfall in June is not expected to have a significant impact, the progress of monsoons in July and August is crucial for the kharif crop season.

Improved monsoon and sowing conditions are anticipated to enhance agricultural output and help reduce food inflation in the coming months.

Non-food inflation continued to ease, reaching a record low of 2.3 per cent for the seventeenth consecutive month. However, core inflation may rise due to increasing international freight costs, crude prices, and domestic telecom price hikes.

Economists predict that declining food inflation will reduce the headline inflation rate to an average of 4.5 per cent. However, no rate cuts are expected in the forthcoming policy as the RBI targets a durable inflation rate of 4 per cent.

The Index of Industrial Production (IIP) increased to 5.9 per cent year-on-year in May, up from 5 per cent in April. This growth was driven by consumer-oriented goods, with consumer durables recording the strongest growth among the six major manufacturing categories. Non-durables also saw an uptick after a decline in the previous month.

However, infrastructure, construction, and capital goods sectors experienced a slowdown, indicating a cooling of investment momentum. The central government's capital expenditure slowed in May due to the elections.

Looking ahead, industrial growth is expected to be supported by improving consumption, particularly in rural areas, thanks to healthy agricultural conditions. Urban economies continue to benefit from robust credit growth, although this is likely to cool as rate hikes take effect and the services sector slows.

Fiscal support may moderate as the central government aims to reduce its fiscal deficit, with the upcoming budget being closely watched for its economic support measures.

Rural India recorded a higher inflation rate of 5.66 per cent in June compared to 4.39 per cent in urban areas. The significant rise in CPI inflation was attributed mainly to escalating food prices, particularly vegetables.

The consumer food price index-based inflation was 9.36% in June, up from 8.69 per cent in May, with the food and beverage basket experiencing an 8.36% inflation rate and vegetable prices soaring by 29.32 per cent.

Analysts expect retail inflation to ease in the coming months due to a favourable base effect and improved kharif sowing. Aditi Nayar, Chief Economist and Head of Research and Outreach at ICRA, estimates that headline CPI inflation could soften to 2.5-3 per cent in July 2024, largely due to the favourable base effect.

However, she cautioned that sustained heavy rainfall could drive up perishable prices, adding uncertainty to the near-term outlook.

Madan Sabnavis, Chief Economist at Bank of Baroda, noted that the post-harvest festival season will be crucial for the revival of demand, especially in rural areas.

He also highlighted encouraging news in the consumer goods sector, with durable goods experiencing 12.3 per cent growth, attributed to both the base effect and post-rabi season spending. However, FMCG goods have seen only a moderate increase in production.