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Published: August 8, 2023
Updated: August 8, 2023

Soaring Food Prices Projected to Drive July Inflation to 6.7%

Economists Predict Sharp Rise in Inflation Due to Surging Food Prices

Economists from a prominent foreign bank have highlighted a significant surge in food prices as they anticipate a substantial increase in retail inflation for July. Their forecast suggests that the inflation rate could rise by a considerable 190 basis points to reach 6.7% compared to the previous month.

July Inflation Projection:

Economists from Deutsche Bank India, led by chief economist Kaushik Das, have released a report ahead of the monthly inflation release and the Reserve Bank's monetary policy review. The report indicates that the Consumer Price Index (CPI) for July is expected to register a year-on-year inflation rate of 6.7%, a marked increase from June's rate of 4.8%.

Monetary Policy Expectations:

The Reserve Bank's Upcoming Decision Amidst Inflation Concerns With the Reserve Bank of India's upcoming bi-monthly monetary policy decision, experts widely believe that the key interest rates will remain unchanged. This anticipation comes after the last rate hike in December 2022, which saw the rate increase by a quarter percentage point, reaching 6.50%.

Food Prices Fueling Inflation:

Rising Costs of Essential Food Items Play a Significant Role The substantial increase in inflation is largely attributed to the sharp rise in food prices, particularly concerning items like tomatoes, onions, and rice. The prices of 22 essential food items escalated by an average of 12.3% month-on-month, in contrast to a mere 2.4% rise in June.

Vegetable Price Surges: Tomatoes, Onions, and Potatoes Witness Dramatic Price Hikes

Among the notable increases in vegetable prices, tomatoes experienced a staggering surge of 236.1% in July, compared to a 38% hike in June. Similarly, onion prices rose by 15.8%, and potato prices climbed by 9.3% in July. The cumulative increase in prices for these three vegetables reached 87.1% in July, as opposed to 16% in June.

Inflation Projection and Revised Forecasts:

Economists Offer Insights into Future Inflation Trends Considering the impact of food inflation, economists have adjusted their forecasts for the Consumer Price Index. While they have revised up the July-September CPI forecast to an average of 5.8%, they have also lowered the Q3 and Q4 FY24 forecasts to 5.3% and 5.2%, respectively. This results in an unchanged CPI forecast of 5.2% for the entire FY24.

RBI's Inflation Forecast Revisions:

Expected Changes in Reserve Bank's Inflation Forecasts The report suggests that the Reserve Bank will likely need to revise its CPI forecast for the second quarter. This adjustment could lead to a slight increase in the full-year forecast for FY24, from the current projection of 5.1% to around 5.2%.

Trends and Future Outlook:

Gradual Easing of Inflation with Potential Fluctuations Although the pressure from rising prices is expected to decrease from August onward, the report points out that a more substantial disinflation in vegetable prices might occur from September. While tomato prices might only ease significantly from September, there could be a potential risk of cereals, especially rice, seeing notable increases.

Economists' Insights and Expectations

As the inflation rate is projected to average around 5.8% during July-September of the current year, the report concludes by highlighting a potential silver lining in core CPI, which could register a lower inflation rate of 5% in July. Despite the challenges posed by food price hikes, the analysis provides valuable insights into the current inflation landscape and its potential trajectory.