Retail inflation rose to the highest since July 2018, led by an increase in vegetable prices.

Consumer Price Index inflation stood at 3.99 percent in September compared to 3.21 percent in August 2019, according to data released by the Ministry of Statistics and Program Implementation on Monday. A Bloomberg poll of 37 economists had estimated inflation at 3.8 percent for September 2019. At current levels, headline inflation is now back at the mid-point of the Monetary Policy Committee’s flexible inflation target of 4 (+/-2) percent. Still, with growth in the economy subdued and inflation within the flexible band set for the MPC, the committee may continue to maintain an accommodative stance on monetary policy. The MPC has cut the benchmark repo rate by 135 basis points so far this year.

Despite the sharper than expected rise in retail inflation, core inflation continue to moderate indicating weak demand. Core inflation, which excludes food and fuel, fell to the lowest since July 2017. It moderated to 3.99 percent in September 2019 from 4.2 percent in the previous month.

Inflation Internals The pick-up in inflation was led mostly by food prices. At 4.7 percent, inflation in the food and beverages category rose to the highest since December 2017, as rainfall distribution skewed agricultural trends across the country. Rural inflation stood at 3.24 percent in September 2019 as against 2.18 percent in August 2019.

Inflation in urban areas stood at 4.78 percent compared to 4.49 percent the previous month.

Food and beverages inflation rose to 4.7 percent in September compared to 2.96 percent in August. Within this category, vegetable inflation spiked to 15.4 percent.

Clothing and footwear inflation was at 0.96 percent compared to 1.23 percent in August.

Housing inflation stood at 4.75 percent in September compared to a growth of 4.84 percent in August.

Fuel and light inflation contracted by -2.18 percent after a contraction of 1.7 percent in August.

Reflection of higher inflation in select food items has now begun to show in retail inflation of meat, fish, vegetables and pulses, said Sunil Kumar Sinha, Principal Economist, India Ratings & Research. “While vegetables and pulses contributed 76.4 percent of the increase in retail inflation in September over August, food inflation is expected to continue to rise at least till March 2020 mainly due to base effect,” Sinha said.

Aditi Nayar, Principal Economist at ICRA expects vegetable prices to normalise below 4 percent over the next two months, particularly with the seasonal arrival of winter supplies.

Divergence In CPI vs WPI The rise in CPI inflation in September ran contrary to a continued fall in WPI inflation. Wholesale inflation data released earlier on Monday had shown a decline to 0.33 percent led by a fall in fuel costs and prices of manufactured items. A break-up of the wholesale index had shown primary articles inflation at 5.54 percent in September against 6.43 percent in August. Food articles inflation stood at 7.47 percent compared with 7.67 percent in the previous month. The divergence is mainly driven by the increase in retail prices of vegetables, even as core inflation at the wholesale and retail levels continue to show similar trends. This, according to India Ratings, will mean a continuation in rate cuts from the MPC.