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Below the Perspective on CPI Inflation by Ms. Rajani Sinha, Chief Economist, CareEdge Ratings 

The CPI inflation has remained on an upward trend inching higher to 3.9% in May from 3.5% in April. While CPI inflation came in lower than expected, it rose to its highest level in 16 months. A sharp increase in transport inflation and higher food inflation were the primary drivers of headline inflation during the month. Food & beverages inflation increased as the favourable base effect from last year waned and due to a seasonal uptick. Heatwaves across several regions also adversely impacted the supply of several food items pushing up the inflationary pressures. Amid the ongoing West Asia conflict and elevated energy prices, the retail fuel prices have been adjusted upward resulting in higher transport inflation. The increase in energy costs has extended beyond transport fuels, with domestic and commercial LPG cylinder prices also witnessing multiple hikes in the recent months. This has resulted in higher second-round effects as evident in higher inflation in restaurants & accommodation services. Higher inflation in transport, restaurants & accommodation services and precious metals pushed up the core inflation to 3.8%. Prices of precious metals witnessed an uptick in May despite a correction in the global prices. This was due to a hike in import duty and rupee depreciation. However, excluding precious metals, core inflation stood close to a benign 2.4% in May implying that the current uptick in inflation is supply-driven rather than demand-driven.

Looking ahead, the global inflation outlook faces risks from external uncertainty and weather-related disruptions. While the government has already begun passing on the impact of higher global energy prices to consumers, there remains scope for further upward revisions. There could be a faster passthrough of prices to the consumers given the much higher levels of WPI inflation. On the domestic front, there are challenges from a below-normal rainfall with chances of El Niño conditions developing during the monsoon season. India remains relatively better placed with higher reservoir levels and robust foodgrain buffer stocks compared to the past El Niño years. Nevertheless, food items, especially vegetables, pulses and edible oils, could witness upward price pressures. Factoring these aspects, we project CPI inflation to average at 5% during FY27 assuming global crude oil prices average at USD 90/bbl during the year. The recent correction in energy prices following the positive developments around the West Asia crisis is favourable for the inflation outlook. However, the situation remains fluid and needs to be monitored.

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