Inflation quickens slightly to 3.7% in August as services, food prices rise

Inflation stayed below 4 percent for second consecutive month

India’s inflation rose slightly to 3.65 percent in August compared with 3.6 percent in the previous month, as a favourable base from last year helped contain consumer inflation despite an uptick in food categories.

The consumer price index print is a tad higher than the Moneycontrol poll median of 3.5 percent. Economists at the MC poll ranged between 3.2 – 4 percent.

“The CPI inflation unexpectedly inched up to 3.7 percent in August 2024... in contrast with our forecast of an easing, largely led by the food and beverages segment," Aditi Nayar, chief economist, Icra said.

Inflation had risen to 6.8 percent in August 2023.

Besides, food inflation, a Moneycontrol analysis shows that higher services inflation also contributed to the rise in the consumer price index. Services (ex-housing) inflation rose to an 11-month high of 3.9 percent in August.

Sequentially, there was no change in overall consumer basket prices in August.

More upside

Economists expect a further pick up in inflation in coming months as base effects fade.

" Looking ahead, the base effect will turn unfavourable in September ahead of an early festive season this time. For FY25, we expect inflation to average 4.8 percent," said Rajani Sinha, chief economist, CareEdge.

Nayar from Icra noted that inflation could rise above 4 percent to 4.8 percent in September, "led by a sharp uptick in the food and beverages inflation print amid the fading of the elevated base."

Experts also indicate a rise in core inflation, which remained unchanged at 3.4 percent in August, to drive inflation in the coming months.

"While food inflation will smoothen as the kharif crop comes in, we expect core inflation to stiffen as input costs get embedded in prices. This category would move up towards the 4% mark," said Madan Sabnavis, chief economist, Bank of Baroda.

The Reserve Bank of India had predicted inflation would settle at 4.4 percent for the fourth quarter. However, a reading below 4 percent for two consecutive months suggests a lower trajectory, experts noted.

Food spoils expectations

While most of the food categories witnessed a softening of prices in July, pulses continued to print a double digit increase. Pulses inflation was a high 13.6 percent in April even after easing from 14.8 percent in the previous month.

Pulses inflation has remained in double digits for 15 months. Vegetable inflation, on the other hand, rose to 10.7 percent from 6.8 percent in the previous month and fruit inflation bounced to 6.5 percen from 3.8 percent in the previous month.

Within vegetables, potato and onion inflation remained above 50 percent despite easing from July.

"The positive effects of better Kharif sowing would be visible only post- harvest, i.e. October 2024 onwards. Till that time, pulses inflation is expected to remain in double-digits and cereals inflation would also be above 6 percent," said Paras Jasrai, senior analyst, India Ratings and Research.

Food accounts for nearly 39 percent of the consumer basket.

"Monitoring the food prices is crucial going ahead, as risks to food inflation have not been entirely mitigated. Controlling price pressures in the food basket is essential, as they can significantly influence households' inflationary expectations," said Sinha from CareEdge.