Retail inflation up in August to 7%, IIP slows sharply


NEW DELHI: Retail inflation accelerated in August on the back of high food prices, reversing a three-month downward trend and remained above the Reserve Bank of India’s (RBI) upper tolerance level of 6% for the eighth consecutive month, which may prompt the central bank to raise interest rates again.
Data released by the National Statistical Office (NSO) on Monday showed retail inflation, as measured by the consumer price index (CPI) rose an annual 7% in August, higher than the 6.7% in July and higher than the 5.30% in August 2021. Food inflation rose to 7.6% during the month from 6.7% in the previous month led by higher prices of cereals, vegetables, milk and milk product prices. Rural inflation was at 7.2%, higher than urban which was at 6.7%.Rural food inflation was at 7.6% while urban was at 7.5%, the data showed.
Separate data released by the NSO showed industrial production growth slowed to a four-month low of 2.4% in July from 12.7% in the previous month and lower than the 11.5% growth recorded in July 2021. This was largely driven by a contraction in mining and slowing activity in manufacturing and electricity and fading out of the base effect.
The retail inflation data showed cereal and product prices rose 9.6% in August while vegetable prices shot up 13.2% during the month. Fuel and light prices 10.8% and core inflation, which is minus food and fuel was at 5.9%.
The finance ministry said that despite erratic monsoon and negative seasonality in vegetable prices, food inflation in August is still lower than the April peak of the current year. “With global inflation pressures, inflationary expectations remain anchored in India with stable inflation,” the finance ministry said on microblogging site Twitter.
Inflation has emerged as a major policy challenge across the world. The RBI has raised rates thrice to rein in inflation pressures and economists said the retail inflation rate going back to 7% in August may prompt the central bank to raise interest rates again in the monetary policy review later this month.
“From a policy perspective, we expect the RBI to raise the policy rates by 50 basis points at its upcoming policy as inflation risks continue to linger on. Moreover, with aggressive tightening by global central banks ( ECB delivered a 75 basis points rate hike and Fed is likely to hike by the same quantum next week), the RBI might be nudged to continue front loading its rate hikes as a defence for the rupee.,” HDFC Bank said in a note.
The IIP data showed the capital goods sector, a key gauge of industrial activity, slowing to 5.8% in July from 30.3% in July 2021 while the consumer non-durables sector contracted 2% during the month. “The impact of slowing global growth is beginning to be felt by domestic manufacturing. Key export sectors such as textiles, petroleum products, machinery and equipment saw sequential fall in IIP in July. This could gain pace over the next 12 months, as aggressive monetary tightening and elevated inflation hit demand prospects in major advanced economies,” said D K Joshi, chief economist at ratings agency Crisil.
“Domestic demand didn’t seem to have lent support to manufacturing either. IIP declined sequentially for both consumer durables and non-durables in July. This might be a result of shifting demand from manufacturing to services. Infrastructure and construction activities saw softening growth as well, suggesting capex activity is yet to see a robust pickup,” said Joshi.





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