Published on 18/08/2020 9:12:00 AM | Source: ICICI Direct

Inflation continues to move higher as disruption continues - ICICI Direct

Posted in Economy News| #Economy #Inflation #ICICI Direct

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Inflation continues to move higher as disruption continues

CPI Inflation (July) 6.93% YoY

Key readings

* CPI inflation for July 2020 rose further to 6.93% compared to upwardly revised June data at 6.23%. Similar to last month, the supply related disruption in food items, higher petrol, gold prices and unfavourable base effect led headline inflation to move higher

* A sharp rise in vegetables prices, higher retail petrol prices and elevated gold prices are major contributors of inflation

* The sequential inflation in food inflation was also higher primarily contributed by vegetables, fruits, oils & fats, milk & products and sugar

* June CPI headline number was revised higher from 6.09% YoY to 6.23%. Many sub-components saw sharp revision both upwards and downwards. Cereals saw higher revision while fuel and light was revised down. This further indicates challenges in interpreting the inflation data

* Core inflation is now at 5.8% with major contributor being personal care & effects (primarily gold prices), transport & communication (retail petrol prices), household goods & services. Going forwards, risks to core inflation remain on the back of elevated international crude and gold prices

* Overall, the weak economic growth continued to take precedence over disruption driven short-term inflation data. Better prospects for Kharif sowing season, favourable base effect and weak structural demand due to economic slowdown augur well for the inflation outlook for H2FY21. RBI may want to look through the current abnormal data print and continue to focus on growth by adopting accommodating liquidity stance even though may not cut benchmark rates


Looking deeper…

* Outlook for food inflation remains favourable: Average base food inflation during April-September 2019 was at 2.6% while October 2019- March 2020 food inflation was at 10.9%. In April-July 2020, average food inflation was at 9.5%. With favourable base effect, record high sowing in Kharif season and normalising lockdown oriented supply side disruption, outlook for food inflation is favourable for H2FY21

* Inflation seems to have peaked out, core inflation a worrying factor: With supply side related disruption is behind, food inflation in general should moderate, going forward. Core inflation components like transport and communication, personal effects due to gold prices may remain elevated. With economic activity improving, some demand side pressure may lead to inching up of a few sub groups of core inflation

* Monetary policy implication: RBI, under the current Governor, has clearly said it is continuing efforts in rate transmission to improve slowing growth. While RBI may not cut the repo rate in the next meeting, the monetary policy stance is likely to remain accommodative while benchmark repo rate may remain lower for longer



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