Vegetable Prices Drive Up India's Inflation For June: Poll

Core inflation, which excludes volatile items like food and energy and is considered a more reliable indicator of domestic demand, was projected to reach 3.10 per cent in June

Consumer price inflation in India likely increased in June, halting a five-month decline, according to a Reuters survey of economists. The uptick is primarily attributed to a surge in vegetable prices, driven by crop damage caused by severe weather conditions. The prices of tomatoes, onions, and potatoes rose sharply last month due to extreme heat and heavy floods in northern states, disrupting agricultural production.

A Reuters poll conducted from July 5-9 involving 54 economists forecasted that consumer price inflation increased to 4.80 per cent year-on-year last month, up from 4.75 per cent in May. Food items constitute approximately half of the total CPI basket. 

"A sharp spike in vegetable prices, along with cereals and pulses, kept food inflation at higher levels and nullified the softness in egg, fruit, and spice prices. Core inflation likely stayed flat at all-time lows of 3.10 per cent as gold prices eased somewhat during the month and commodity prices also remained under pressure,” said Kanika Pasricha, chief economic advisor at Union Bank of India.

Core inflation, which excludes volatile items like food and energy and is considered a more reliable indicator of domestic demand, was projected to reach 3.10 per cent in June, according to the median estimate from a smaller group of 19 economists. Although the Indian statistics agency does not officially publish core inflation figures, economists derive estimates from CPI data.

Several economists argue that despite the economy expanding by over 8 per cent in the last fiscal year, the recent decrease in core inflation points to overall subdued domestic demand in an economy where private consumption contributes to nearly 60 per cent of GDP.

Additionally, analysts noted that a telecommunications tariff increase, effective this month, is expected to exert upward inflationary pressure in the upcoming months, potentially halting a further decline in core CPI.

Sajjid Chinoy, chief India economist at J.P. Morgan, said, "Given the weight in the CPI basket (for telecoms) and past translation trends, this should push up headline CPI by another 20 bps or so, starting July. To the extent that this is a one-off price hike, the RBI should look through this. But again, it adds to the uncertainty of the inflation outlook."

With inflation expected to stay above the Reserve Bank of India's 4 per cent medium-term target this fiscal year and next, the central bank is forecast to cut rates just once this year, next quarter.

The survey showed that the wholesale price index-based inflation likely surged to an annual 3.50 per cent last month from 2.61 per cent in May.