The lower August retail inflation print compared to the previous month does not necessarily mean that inflation worries have receded. At 6.8 per cent, it is well above the Reserve Bank of India’s threshold of 6 per cent, but lower than July’s 7.4 per cent, which was a 15-month high. For the July-September inflation to wind up at the RBI’s projected level of 6.2 per cent, the September inflation must not exceed 4.4 per cent, which looks a tall order. Inflation is likely to be in the 5-6 per cent range in the remaining two quarters. It remains to be seen whether the RBI’s inflation projection of 5.4 per cent for FY24 can be met, in view of a deficit monsoon and the likelihood of election spending exerting pressure on prices.

To be sure, downward pressures on inflation are at work. For instance, tomato inflation, which blew up the July inflation numbers, has fizzled out. As a result, inflation in vegetables, which account for a weightage of 7.5 per cent in the overall CPI, with TOP (tomato, onion and potato) accounting for a third of the vegetables index, too retreated a bit to 26.1 per cent against 37.3 per cent in July. However, vegetable price inflation, which is largely seasonal, is pronounced this time due to poor rain. A cut in LPG cylinder prices by ₹200 brought down August inflation by 20-30 basis points, while the incremental CRR too sucked out liquidity and played a role in curbing price rise. These factors would continue to play a role in reducing price rise in coming months, even as the RBI is winding down I-CRR gradually to ensure that businesses are not hit by tight liquidity. Core inflation, at 4.8 per cent, is moderate but sticky due to inelastic demand for services such as health, education and telecom.

However, inflation could stay above normal. With reservoir levels at 62 per cent of their live storage capacity, against the 10-year average of 86 per cent, the outlook on foodgrain output for both kharif and rabi is not exceptional. It is notable that food output growth has outpaced population growth in recent years, going by official figures. Even so, cereals and pulses prices have been elevated (and rising at double digits for about a year), while milk prices too have been rising at about 8 per cent. This is a scenario of stubborn rather than ‘seasonal’ inflation, for which a host of structural factors and policies are perhaps responsible.

The RBI and Finance Ministry must grapple with this question. While balancing growth and inflation goals, they must prioritise the latter for now to protect purchasing power and quality of food consumption. Higher inflation, led by food, can compress demand. Inflation remains truly intriguing in India today. It exists amidst islands of price depression, as in the FMCG sector where corporate toplines are flat. The impact of relative price changes on consumer behaviour needs to be understood.