Inflation Accelerates to Eight-Month High
India’s retail inflation rose to 4.82 percent in August, up from 4.45 percent in July, marking the highest level in eight months under the Consumer Price Index (CPI) series with 2024 as the base year. This increase pushes headline inflation further above the Reserve Bank of India’s (RBI) medium-term target of 4 percent, which it has now exceeded for three consecutive months since May.
The acceleration is primarily attributed to rising food prices, which continued to pressure household budgets. The Consumer Food Price Index rose 5.95 percent year-on-year in August, compared to 5.52 percent in July. Rural food inflation was notably higher at 6.13 percent, while urban food inflation stood at 5.64 percent.
Food Prices Drive the Surge
The rise in food inflation was uneven across commodities. Onion prices more than doubled, with inflation jumping to 48.27 percent in August from 22.54 percent in July. Garlic inflation also increased to 43.60 percent from 35.36 percent, while ginger prices remained sharply elevated at 73.82 percent.
However, some vegetables provided relief to consumers. Tomato prices fell 31.09 percent from a year ago, and potato prices declined by 13.14 percent. Despite these declines, the overall food basket remained expensive, contributing to the higher headline figure.
Services and Precious Metals Add Pressure
Price pressures were not limited to the food sector. Inflation in restaurants and accommodation services stood at 8.38 percent in August, while transport inflation was 4.60 percent. Personal care, social protection, and miscellaneous goods and services recorded a significant inflation rate of 15.17 percent.
Precious metals continued to exert an outsized influence on certain categories. Silver jewellery inflation stood at 107.11 percent, while gold, diamond, and platinum jewellery prices were 35.53 percent higher than a year earlier. These factors contributed to the broader rise in the CPI.
Implications for Monetary Policy
The August inflation data is particularly significant as it is the last retail inflation number available before the RBI’s Monetary Policy Committee (MPC) meets from October 5 to 7. The September CPI data will only be released on October 12, after the policy decision.
At its August meeting, the MPC unanimously kept the repo rate unchanged at 5.25 percent and maintained a neutral stance. However, the latest data has shifted market expectations. Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank, noted that while headline inflation was in line with expectations, the 2QFY27 average inflation is expected to be about 20 basis points higher than the RBI’s estimate of 4.7 percent.
"Given RBI’s measures in withdrawing durable liquidity along with adverse global conditions we continue to see scope for 50-75bp of rate hikes by the MPC, with now the odds of an action in October increasing significantly," Bhardwaj said. This suggests that the RBI may consider tightening monetary policy in response to the persistent inflationary pressures.