The latest retail inflation numbers point to a slight softening in the pace of price gains, and that should provide policymakers some solace that recent interventions appear to be working. Inflation measured by the Consumer Price Index (CPI), slowed 75 basis points from April’s 95-month high of 7.79%, to 7.04% in May. While it is hard to quantify the effect that the RBI’s surprise 40 basis points interest rate increase of early May had on prices, the Center’s May 21 decision to cut the excise duty on petrol and diesel by ₹ 8 and ₹ 6, respectively, seems to have had an immediate impact. Inflation in the transport and communication category of the CPI slowed by 137 basis points to 9.54% last month. This key category, with a weight of 8.59 that places it behind only cereals and housing, captures the pump prices of the main transportation fuels, making it a crucial indicator of price pressures in the economy. A closer look, however, shows inflation in the category continued to quicken sequentially, even if at a slower pace. Disconcertingly, rural consumers, who have comparatively lower purchasing power than their urban peers and yet are heavily reliant on the fuels for farm operations, experienced a significantly slower softening of only 42 basis points in the year-on-year pace. With the price of the Indian basket of crude oil now having surged by almost 8.5% from April to a 10-year high this month, and the rupee plunging to successive new record lows against the dollar, it would be unwise to drop one’s guard especially given the pass-through impact transportation costs have on most other prices.
Food prices, the other driver of retail price gains, offered far less respite with the Consumer Food Price Index (CFPI) inflation slowing by only 34 basis points to 7.97%. City consumers experienced an acceleration in food price gains as urban CFPI inflation quickened 11 basis points to 8.2% last month. Nine of the 12 items on the food and beverages sub-index of the CPI, also quickened sequentially, resulting in the month-on-month inflation accelerating 30 basis points from April’s pace. Prices of vegetables and those of meat and fish surged 18.3% and 8.23%, respectively, from their year-earlier levels, adding to the nutritional precarity of low-income households. And even though inflation in edible oils slowed from April’s pace, there is no room for complacency given that price gains in the vital cooking medium were still running at 13.3% amid persistent supply concerns in the wake of the Ukraine war and the disruption in sunflower oil imports. May’s wholesale price data also provide little comfort, with headline WPI inflation quickening to a fresh high of 15.9%. With the RBI’s consumer confidence survey showing an appreciable deterioration in households ’expectations of the one-year ahead price level, authorities must stay laser-focused on the battle to tame inflation.