Miscellaneous items, clothing and footwear, and pan, tobacco and intoxicants pushed inflation up, prompting independent economists to forecast another round of monetary easing by the Reserve Bank.
Inflation, as measured by the consumer price index (CPI), was 6.09% in June, up from 5.84% in March, the last official headline inflation number released by the government, even as food inflation cooled to a nine-month low of 7.87% in June from 9.2% in May. As per experts, a decline in demand has not had any impact on prices and inflation has hardened on supply side disruptions.
Retail inflation in June 2019 was 3.18%.
“The headline CPI inflation for June 2020 has exceeded the upper end of the MPC’s target range, posing a dilemma in terms of the appropriate policy response as the economy gradually extricates itself from the supply and demand shock created by the pandemic,” said Aditi Nayar, principal economist at ICRA.
Though the pandemic-related restrictions were gradually lifted and non-essential activities started resuming operations, the government said: “The data collected, however, did not meet the adequacy criteria for generating robust estimates of CPIs at the state-level”.
The National Statistical Office also released a technical note detailing the imputed index data for April and May using the methodology recommended in ‘Business Continuity Guidelines’, brought out by Inter-Secretariat Working Group on Price Statistics — a combined forum of ILO, EuroStat, OECD, UNECE, World Bank and IMF — in May.
“This is for the first time that the data flow was disrupted not at the local level but at the national level for several commodities,” NSO said in the note explaining the methodology proposed to be followed for filling gaps in CPI series for non-availability of price data in April-May.
As per calculations from the imputed index, retail inflation rose to 7.22% in April but eased to 6.27% in May.
Monetary easing likely
While inflation in urban areas was 5.9% in June, it was 6.2% in rural areas.
Clothing and footwear inflation was at 3.53% in June and that in pan, tobacco and intoxicants was 9.7%. Fuel and light inflation was at 2.69%.
“Given that the MPC has already front loaded most of its scope of rate cuts in anticipation of moderating inflation trajectory, we see room for another 25 bps of rate cut followed by a probable pause,” Bhardwah said.
Nayar expects “an asymmetric cut of 25 bps in the repo rate and 35 bps in the reverse repo rate in the next policy meeting”.
“In our view, the MPC will choose to frontload its assessment of the space for further rate cuts, in a bid to support sentiment and hasten transmission amid the substantial surplus in systemic liquidity, although the decision is unlikely to be unanimous,” Nayar said.