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Unpacking Retail Inflation Surge: Implications Demystified



  Aug 18, 2023

Spike in Retail Inflation and Its Implications:Explainer


1. What is causing the surge in retail inflation?

The surge in retail inflation is attributed to the Consumer Price Index (CPI), which contains a significant share of food items. A rise in food inflation directly contributes to an escalation in overall retail inflation. Over the past year, food inflation reached 11.51%, predominantly due to a substantial 37.34% surge in vegetable prices. Tomato prices, for instance, skyrocketed by a staggering 201.54%, while items like ginger, garlic, and green chili also witnessed notable price hikes.
 

2. What factors are driving persistently high food prices?

The inflation rates of staple cereals like rice and wheat have entered double digits. Prices of pulses registered increases of 10.6% and 13.3% in June and July. The ongoing kharif-sowing season indicates a reduced cultivation area for pulses, oilseeds, and cotton compared to the previous year. Any further reduction in output could potentially escalate prices. Furthermore, the RBI highlighted supply disruptions due to unfavorable weather conditions contributing to the price uptrend.
 

3. How does this scenario impact the RBI's objectives?

The Reserve Bank of India (RBI) has a target of maintaining retail inflation at 4%. However, the July inflation rate of 7.44% presents a challenge in meeting this goal. Although the surge in food prices may be temporary, it is expected to take several months to stabilize. Consequently, the projected retail inflation for July to September is anticipated to surpass the RBI's target.
 

4. What implications does this hold for the repo rate?

The RBI manages inflation by adjusting the repo rate, the interest rate at which it lends to banks. Given that the RBI's influence over food prices is limited, the probability of a repo rate hike remains low. The current repo rate is likely to be maintained, primarily due to the potential for heightened food prices to contribute to overall inflation, influencing interest rates on mortgages and loans throughout 2023.
 

5. Why is it taking time for food prices to normalize?

Despite a decline in tomato prices with new supply in August, they remain elevated compared to previous months. Moreover, tomato prices in August 2022 were lower than in July 2022. This ongoing trend implies that the inflation in tomato prices during August will continue to contribute to overall food inflation.
 
In conclusion, the elevated retail inflation, mainly driven by surging food prices, presents challenges for the RBI's inflation targets and decisions regarding interest rates. The volatile nature of food prices and their impact on overall inflation underscore the need for vigilant monitoring by policymakers and the implementation of appropriate measures to manage inflationary pressures effectively.


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