High food prices allow only a slight moderation in inflation

Consumer price index (CPI) inflation moderated slightly to 4.75% in May from 4.8% in April. Non-food categories drove down the headline number, but what’s worrying is the relentless inching up of key food categories — cereals and pulses — and the rigidity in vegetables at elevated levels.

Food inflation has stayed above 8.5% for four months now. In May, seasonal pressures kept it at 8.7%, unchanged from April.

Non-food inflation continued to offer some respite, printing at a record low of 2.3%. Much of this was due to the core sliding to 3%, also a record.

The southwest monsoon has arrived on time; now, its progress will influence how food inflation moves over the next few months. From June, the high base would offer support, but a sharper easing in inflation, particularly food inflation, will depend on the advancement of the monsoon.

For this fiscal, we expect inflation to average 4.5%. Assuming a normal monsoon, we expect food inflation to soften. Non-food inflation could see a statistical uptick but is overall expected to remain soft on the back of benign commodity prices. Geopolitical developments need to be watched as escalations in ongoing tensions could push up commodity prices and constrain supply chains.