Inflation to ease further in September, CFO News, ETCFO

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Even as easing vegetable prices has brought down retail inflation risks are emerging from the global commodity markets as crude prices ruling above $ 90 per barrel pose a challenge, the latest state of the economy published in the RBI bulletin said.

On a positive note, the economists from the Reserve Bank expect the slowing of inflation largely driven by the correction of vegetable prices from the July peak to continue in September as well. “ The correction is not complete, and more is expected to drive down retail inflation in its September reading” said the state of the economy report written by RBI economists. “Furthermore, there are early indications of corrections in a broad range of vegetable prices going beyond the tomato, onion and potato group”. The views are however not that of the Reserve Bank.

A new risk to global financial stability stems from the commodity markets as crude prices ruling above $ 90 per barrel challenge 10-month highs due to Saudi Arabia and Russia extending voluntary production cuts to the end of 2023. The strength of the US dollar on safe haven demand is also making crude prices higher. A 10 percent rise in crude prices is estimated to impact consumer price inflation by 0.25 percentage points according to market analysts.

The central bank economists have acknowledged that core Inflation is stabilizing as reflected in a broad-based easing of price pressures across its constituents, both goods and services. Even both rural and urban CPI inflation have eased. This is an important development in the conduct of monetary policy, they say.

Headline CPI inflation moderated to 6.8 per cent in August 2023 from 7.4 per cent in July. The 60 bps (one basis point is 0.01 percent) softening in inflation came from a negative momentum of around 10 bps which was supported by a favourable base effect of about 50 bps

Moreover the broad-based recovery in the economy has raised optimism on the inflation front as well. The economy grew by 7.8 percent in the June quarter, the same as projected in the August edition. The adverse impact of the drop in exports due to the general slowdown in the global economy was offset by domestic drivers – private consumption and fixed investment.

Available indicators point to a gain in quarter-on-quarter (q-o-q) momentum on the back of domestic demand. Retailers especially in lifestyle products and shopping malls are experiencing a sharp recovery in sales in the past few weeks. “This has raised hopes of a pick-up in demand through the rest of the festival season that began with Raksha Bandhan and Onam, and cheers for discretionary retail spending” the economists said. There are also indications that rural demand for fast moving consumer goods has swung back into positive territory after being under pressure for over a year.

  • Published On Sep 19, 2023 at 08:53 AM IST

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