AA Edit | Retail Inflation Rises, Act Now

The rise in retail inflation to 4.82 per cent in August has finally confirmed that the combined impact of the US-Iran war induced fuel crisis and El Nino-related weather disruptions on household budgets. Though the retail inflation, which the Reserve Bank of India tracks for its monetary policy, remains within its tolerance band of two to six per cent, the price rise could exert pressure on the Central bank to act to contain inflationary expectations.

Food items, which have one-third of weight in retail inflation, remain the most visible source of distress. Onion prices surged 48.27 per cent, garlic 43.6 per cent and ginger nearly 74 per cent because of an uneven monsoon. Though the prices of tomato, potato and a few other vegetable prices have contracted, they offered limited comfort for keeping the retail inflation anchored.

The impact of food prices appears greater on wholesale inflation, which accelerated to 9.92 per cent. Fuel and power inflation climbed to 22.93 per cent, while manufactured product inflation hit a series high of 8.37 per cent. Rural inflation was considerably higher at 5.23 per cent than the 4.31 per cent recorded in urban areas.

The RBI is likely to take the August inflation figures seriously when its Monetary Policy Committee meets from October 5 to 7, even though both retail and wholesale inflation are to be driven by supply factors, which interest rate hikes cannot fix.

Analysts expect a 25 basis point increase in October, followed by another in December if inflation persists, would help anchor inflation expectations and preserve the rupee’s real-rate credibility.

Nevertheless, the heavy lifting needs to be done by Central and state government officials. Instead of waiting for inflation to cross six per cent, they need to intervene to improve food supplies, release buffer stocks where necessary and limit avoidable fuel-price transmission.