Vegetable price surge spurs retail inflation to 4.81% in June, breaks downward trajectory

India's headline retail inflation rate halted its four-month decline and increased to 4.81 per cent in June from 4.31 per cent in May, as revealed by data released by the Ministry of Statistics and Programme Implementation on July 12. This rise was primarily attributed to a surge in vegetable prices and the dissipation of the favourable base effect.

The June Consumer Price Index (CPI) inflation print of 4.81 per cent brings the average for the first quarter of 2023-24 to 4.6 per cent, aligning with the Reserve Bank of India's (RBI) forecast. Notably, the latest inflation figure exceeded economists' expectations of 4.6 per cent.

Although CPI inflation remained within the RBI's tolerance range of 2-6 per cent for four consecutive months, it has now surpassed the central bank's medium-term target of 4 per cent for 45 consecutive months.

In June, higher food prices drove inflation, with the Consumer Food Price Index recording a month-on-month increase of 2.5 per cent. Leading this surge were vegetable prices, which soared by 12.2 per cent compared to May, despite a year-on-year inflation rate of -0.93 per cent, indicating a decline in vegetable prices compared to June 2022.

Other food items that experienced notable month-on-month price increases included meat and fish (3.8 per cent), pulses (3.4 per cent), eggs (5.5 per cent), and spices (2.3 per cent). Overall, food inflation surged to 4.49 per cent from 2.96 per cent in May.

The rise in June inflation was also influenced by the waning favourable base effect, which had contributed to a 25-month low in CPI inflation in May.

Price momentum for non-food items remained subdued. The clothing and footwear index increased by 0.4 per cent month-on-month, while the miscellaneous category, comprising certain services and household goods, saw a 0.3 per cent increase. The fuel and light category recorded a minimal increase of 0.1 per cent, while the housing index declined sequentially for the first time in six months.

Core inflation, which excludes food and fuel items, remained largely unchanged at 5.1 per cent from May.

Aditi Nayar, Chief Economist and Head of Research & Outreach at ICRA Ltd commented, "A less supportive base and the onset of the spike in vegetable prices pushed up the CPI inflation to a higher than anticipated 4.8 per cent in June 2023, arresting the welcome cooling seen in the previous four months. The IIP growth rose to a three-month high of 5.2 per cent in May 2023, in line with our expectations, led by all the use-based industries except consumer non-durables and infra/construction goods."

The rise in retail inflation highlights the challenges posed by increasing vegetable prices and their impact on overall inflation, warranting continued attention from policymakers and analysts.