Inflation rises to 4.81% but factory output surprises positively with 5.2% growth
The latest number positively surprised analysts since it turned out marginally higher than the Bloomberg forecast of 5%
After moderating for four months, retail inflation grew higher-than-expected in the month of June on the back of higher food prices. Factory output, as measured by the Index of Industrial Production, meanwhile, rose 5.2% in May, the highest since February 2023.
Retail inflation, as measured by the Consumer Price Index (CPI), grew 4.81% in June, compared to a 25-month low of 4.31% in May. The latest headline print is the highest value since March (5.6%). Even on a sequential basis, the CPI index grew 1% in June from May, the highest value since April 2022. Moreover, the June inflation came on top of a high base since the annual inflation rate was 7% in June 2022.
At 4.8%, the June inflation value came higher than market expectations. This is 0.2 percentage points higher than the 4.6% forecast by a Bloomberg poll of economists. With the latest inflation number, the retail inflation for the quarter ending June 2023 is 4.61%, which is close to the RBI’s forecast of 4.6%. June is also the fourth consecutive month when the benchmark inflation rate has been below the 6% threshold which is the upper limit of RBI’s tolerance band under India’s inflation targeting framework. However, headline inflation staying above the RBI’s medium-term target of 4% for the 45th straight month, reaffirms the hawkish commentary by the RBI’s Monetary Policy Committee.
The bulk of the increase in June inflation is the result of the upsurge in food prices, while the core inflation – it measures the non-food non-fuel components of the CPI basket – remained flat at 5.1% . Food inflation, as per the National Statistical Office (NSO) press release accelerated to 4.5% in June, from 3% in May. A sharp rise in the prices of pulses and spices – the annual growth in these two sub-categories was 10.5% and 19.2% in June 2023 – is the biggest reason for the upturn in food inflation. To be sure, cereal inflation remains high at 12.7% in June 2023. The fact that the union government announced stock limits on wheat on June 12 suggests that cereal inflation remains to be a matter of concern at the policy level. Prices of vegetables fell by 0.9% in June on a yearly basis, but grew 12.2% in June from May on a sequential basis.
Experts believe that uneven monsoon factors led to the June inflation. “With base effect fading, inflation based on the Consumer Price Index (CPI) is now responding to sequential price movements. In June, the jump in vegetable prices, stiff cereals inflation and a sharp rise in pulses inflation pushed headline inflation up…. While seasonal factors in these items were leading to a gradual uptick, weather-disruption amplified the rise in food inflation,” said Dharmakirti Joshi, Chief Economist at CRISIL in a research note.
In another set of statistics released by the NSO, industrial growth rose 5.2% in May from 4.5% in April . The latest number positively surprised analysts since it turned out marginally higher than the Bloomberg forecast of 5%. Manufacturing, which has a weight of more than three-fourth of the index, grew at 5.7% in May, from 5.2% in April. Electricity sector grew by 0.85% in May against a 1.1% contraction in April, signalling the rise in power demand owing to high temperatures in May. A use-based classification of the IIP index showed that the growth was broad-based across segments. While capital (8.2%) and infrastructure/construction goods (14%) predominantly led the growth in manufacturing sector in May, consumer durables recorded a positive print for the first time in six months (1.1%).
Going forward, experts believe that global growth and monsoon performance can swing the industrial performance. “Firstly, a global economic slowdown is on the cards for the second half of this year even though major advanced economies have remained resilient in the first half of this year. S&P Global expects a shallower but more protracted slowdown in the United States as interest rates stay elevated for longer. Secondly, monsoon’s performance will critically influence rural demand. While overall monsoon has turned normal, spatial distribution remains very uneven and kharif sowing lower on-year across most crops. The El Nino has set in as expected, whose timing and intensity will weigh on rain performance this year”, Joshi added in the research note.
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