The government’s Statistics Ministry will come out with retail inflation based on the Consumer Price Index (CPI) for September this evening. The expectation is it could be in the range of 5.5 to 6 per cent against 6.8 per cent in August and 7.4 per cent last September.

If the rate falls below 6 per cent, it will happen after two successive months of 6 per cent plus. It also means inflation will be below the upper tolerance level of RBI’s targeted inflation range of 2-6 per cent with a median rate of 4 per cent. This also means the policy repo rate (the rate at which RBI lends money to scheduled commercial banks) will remain frozen.

The basic reason for the possible drop in the inflation rate is a sharp reduction in vegetable prices and edible oil prices. However, the prices of cereals and pulses are still high. As food and beverages make up more than half of the CPI, sharp changes in the prices of some items impact the overall inflation rate. For example, the price surge of tomatoes and other vegetables pushed the inflation rate beyond 7 per cent in July.

Now, there is a big concern about oil prices. Rising crude oil prices will likely increase inflation in the world’s third-largest oil importer. Oil prices rose around 3% on Monday to trade around $90 a barrel. The rise continued on Tuesday also, and the expectation is that it will remain high over the remainder of the year on global supply concerns.

In his statement last week after a meeting of the Monetary Policy Committee, RBI Governor Shaktikanta Das said that the heightened inflation levels in July and August, at 7.4 per cent and 6.8 per cent, respectively, were largely driven by food price pressures. Vegetables, weighing around 6 per cent in the CPI basket, contributed to about one-third of CPI headline inflation in July and around one-fourth overall inflation in August. Sustained inflationary pressures in cereals, pulses, and spices added to the overall food inflation.

On the positive side, core inflation softened to 4.9 per cent during July-August 2023. It has eased by around 140 basis points from its recent peak in January 2023. Further disinflation of the core component is critical for price stability. As evident from the RBI survey, there is further progress in anchoring inflation expectations, which entered the single-digit zone for the first time since the COVID-19 pandemic.

While near-term inflation is expected to soften on the back of vegetable price correction, especially in tomatoes, and the reduction in LPG prices, the future trajectory will be conditioned by several factors. For Kharif crops, the area sown under pulses is below the level a year ago. Kharif onion production needs to be watched closely. Demand-supply mismatches in spices are likely to keep these prices at elevated levels. The inflation trajectory will also be shaped by El Niño conditions and global food and energy prices.

These factors and global financial market volatility pose risks to the outlook. Considering these factors, “CPI inflation is projected at 5.4 per cent for 2023-24, with Q2 at 6.4 per cent, Q3 at 5.6 per cent and Q4 at 5.2 per cent. The risks are evenly balanced. CPI inflation for Q1:2024-25 is projected at 5.2 per cent,” Das said.

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