Retail inflation dips to 25-month low of 4.25% in May as food, fuel prices soften

Retail inflation declined to a 25-month low of 4.25 per cent in May mainly on account of softening prices of food and fuel items. Inflation based on the Consumer Price Index (CPI) stood at 4.7 per cent in April 2023 and 7.04 per cent in May 2022.

This is the fourth straight month when retail inflation has declined and the third month in a row that CPI-based inflation remained within the RBI’s comfort zone of below 6 per cent. At 4.25 per cent, retail inflation is the lowest since April 2021, when it was 4.23 per cent.

The May 2023 figure brought inflation closer to the RBI’s comfort level of 4 per cent and extended the decline past the central bank’s upper limit of 6 per cent, paring concerns of an eventual resumption of its tightening cycle

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The government has tasked the RBI to ensure retail inflation remains at 4 per cent with a margin of 2 per cent on either side. Last week, the RBI kept policy rates unchanged at 6.5 per cent and projected retail inflation for the current fiscal to average at 5.1 per cent, with June quarter inflation pegged at 4.6 per cent.

According to data from the Ministry of Statistics and Programme Implementation (MOSPI), inflation for the food basket was at 2.91 per cent in May, lower than 3.84 per cent in April. The food basket accounts for nearly half of the CPI. Inflation in fuel and light eased to 4.64 per cent, from 5.52 per cent in April.

Food inflation falls

Consumer food inflation fell to 2.91 per cent from 3.84 per cent in the previous month, amid significant deflation for oils and fats (-16.01 per cent vs -12.33 per cent in April), vegetables (-8.18 per cent vs -6.5 per cent), and meat and fish (-1.29 per cent vs -1.23 per cent). In the meantime, inflation slowed for transport and communication (1.1 per cent vs 1.17 per cent), housing (4.84 per cent vs 4.91 per cent), and fuel and light (4.64 per cent vs 5.52 per cent). On a monthly basis, consumer prices rose at a steady pace from the previous month at 0.51 per cent.

Speaking to The Federal, Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares and Stock Brokers, said: “The May 2023 retail inflation rate of 4.25 per cent is in line with our forecast. The sharp decline in inflation in recent months is primarily attributable to a favourable base effect, rather than a month-over-month loss of inflationary momentum. In addition, the core inflation rate for goods continues to be relatively elevated. 

“In its most recent monetary policy statement, the RBI made it abundantly clear that inflation remaining below 6 per cent, which is typically considered to be within the RBI’s comfort zone, would not be sufficient for the central bank to alter its policy stance.”

“Our estimates indicate that, despite remaining close to 4 per cent, retail inflation is unlikely to fall below this level over the next 12 months. Considering the lack of a significant loss of inflationary momentum from month to month, with elevated core goods inflation, and retail inflation remaining above the RBI’s inflation target, we anticipate that the central bank will remain in an extended pause mode, and there will be no rate cuts during the remainder of the current year, and probably in the first half of the following year as well,” he added.

Monsoon risk

Gaura Sen Gupta, India Economist, IDFC FIRST Bank, said CPI inflation was in line with expectations at 4.25 per cent in May 2023 from 4.7 per cent in April, aided by supportive base effects. “Details indicate that the moderation was led by food inflation, followed by core and fuel. The most positive part was that core inflation (CPI minus food, fuel and tobacco) was softer at 5.1 per cent vs 5.3 per cent in April. Looking ahead, headline inflation is expected to rise with waning support from base effects. For the full year FY24, CPI inflation is expected to average at 5 per cent, broadly in line with the RBI’s estimate. The key risk to inflation remains the monsoon, with a high chance of El Nino conditions developing.”

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“From a monetary policy perspective, we expect RBI to remain on a prolonged pause, with CPI inflation not reducing to the 4 per cent target on a durable basis in FY24.  Growth recovery has proved resilient, with IIP growth surprising on the upside at 4.2 per cent YoY in April. High-frequency indicators show that strong growth conditions continue to prevail in April / May 2023, supporting our expectation of FY24 GDP growth coming in at 6.2 per cent. The relatively resilient growth recovery provides monetary policy space to focus on reducing inflation,” she added.

Annual inflation rate

The annual inflation rate in India slowed sharply to 4.7 per cent in April 2023, the lowest since October 2021, from 5.7 per cent in March, and slightly below forecasts of 4.8 per cent, said MOSPI figures. Food inflation came in at 3.84 per cent, the lowest since November 2021. The inflation rate for the rest of this year is projected to remain below the RBI’s 6 per cent threshold.

The inflation rate averaged 6.03 per cent from 2012 until 2023, reaching an all-time high of 12.17 per cent in November 2013 and a record low of 1.54 per cent in June 2017.

A research report released by the Bank of Baroda reveals that after rising by 6.7 per cent in FY23, CPI inflation is expected to moderate to 5.0-5.5 per cent in FY24, owing to base effects and easing commodity prices. However, a risk to projections would be the prevalence of El-Nino conditions. If this persists, summer crops (Kharif) will be affected, which would translate to higher inflation.