Higher prices of food items such as cereals and vegetables and increase in housing sector pushed the retail inflation based on Consumer Price Index (CPI) to 7 per cent in August. At the same time, industrial production growth rate, based on Index of Industrial Production dipped to a four month low of 2.4 per cent in July.

Food inflation is much higher than the overall rate and surged to 7.62 per cent. Overall retail inflation and food inflation were 6.7 per cent and 6.69 per cent respectively in July. This is the eighth successive month that the inflation is over upper ceiling of targeted inflation rate range of 2-6 per cent, with median of 4 per cent.

Experts believe that headline inflation to move up further in September. If it happens, then it would be three successive quarter of headline inflation breaching upper tolerance level. This means Reserve Bank of India (RBI) will have to give detailed explanation to the government and it is expected to take place in October. Meanwhile, there is an expectation that the monetary policy committee (MPC) will go for fourth rate hike next month which could result in fresh loan and existing EMIs to go up.

DK Srivastava, Chief Policy Advisor with EY India feels that the August print is driven largely by domestic causes especially due to uneven monsoon having an adverse impact on food prices. “Household budgets would be affected especially the lower income segments because of the relatively higher share of food and related items in their consumption baskets,” he said.

Swati Arora, Economist with HDFC Bank says, “Core inflation continued to stay elevated and sticky led by higher household goods and services, recreation and amusement and personal care.

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Going forward, “we expect inflation to rise further to 7.2 per cent in September amid a low base from last year and higher food prices.” Vegetable prices rose by 4.2 per cent while rice have increased by 0.8 per cent in September till date as per the Mandi prices. “We expect inflation to remain above the RBI’s upper band of 6 per cent until February. From a policy perspective, we expect the RBI to raise the policy rates by 50 bps at its upcoming policy,” she said.

Industrial growth

The manufacturing sector grew by 3.2 per cent yoy (a four-month low) and electricity sector by 2.3 per cent yoy (a six-month low). Mining sector witnessed a contraction of 3.3 per cenyt yoy in July 2022 after a gap of 16 months despite the coal output increasing by 11.4 per cent yoy in the same period. Overall, the IIP growth during April-July stands at 10 per cent.

A note prepared by Sunil Kumar Sinha and Paras Jasrai of India Ratings & Research (Ind Ra) reiterated that a rebound of the consumer non-durable segment is critical for a sustained and broad based industrial recovery.

Going forward, the recovery in this segment looks challenging due to the squeezing of the purchasing power of the households as wage growth is lagging behind inflation.

“The high frequency indicators are giving a mixed signal. While the coal production in August was up 8.3 per cent yoy, the power generation was up only 3.1 per cent yoy. All in all, Ind Ra expects the factory output to have a yoy growth in low to mid-single digits in August 2022,” it said.

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