Food inflation will moderate soon, higher inflation may delay rate cut: Experts on June inflation

After the retail inflation data showed that food inflation in June almost doubled year-on-year to 8.3 percent, economic experts are optimistic that food inflation will decrease in the coming months.

The experts stated that a normal monsoon may provide some relief to consumers in the coming months.

"Vegetables inflation, which has now remained in double digits for eight months, is a major worry, as is rigidity in food grains inflation. Although June rains were deficient, it is not a major concern because July and August rains are what matter for kharif. We expect the progress on monsoon and pick-up in sowing to improve agricultural output and cool off food inflation in the coming months," said Dharmakirti Joshi, Chief Economist at CRISIL.

Government data showed on Friday that retail inflation for all segments of food - cereal and products, meat and fish, egg, milk and products, oils and fats, fruits, vegetables in particular, pulses and products, sugar, spices, prepared snacks, and sweets - rose month-on-month.

The experts also highlighted that the agriculture commodities were the major cause of rise in June inflation and government should invest more in the agriculture to strengthen the sector.

"Out of the top 10 commodities that contributed most to CPI inflation in June, 9 are agri-commodities, primarily vegetables and pulses. Keeping a high repo rate by RBI cannot bring down such an inflation. What it needs is more investment in Agri-R&D to raise their productivity in the face of climate change as also building their more efficient value chains" said Ashok Gulati, Indian Council for Research on International Economic Relations (ICRIER) Professor and Agricultural Economist

The experts pointed out that in the coming months, core inflation, the dominant part of non-food inflation, could see an upside due to the recent firming up of international freight costs, crude prices, and hikes in domestic telecom prices.

"Achieving the four percent inflation target still looks distant and the virtuous rate cycle will have to wait longer" said M Govind Rao, Member, Fourteenth Finance Commission and former Director, National Institute of Public Finance and Policy.

Sanjeev Agrawal, President of PHD Chamber of Commerce and Industry, commented on CPI inflation, expecting that food prices will stabilize in the coming months and that the inflation trajectory will also soften and stabilize between 4 and 4.5 percent.

He said, "CPI inflation for the month of June is majorly stoked by the Food and Beverages inflation rising from 7.9 percent in May 2024 to 8.4 percent in June 2024. Overall inflation has increased a bit from 4.8 percent in May 2024 to 5 percent in June 2024."

Industry experts also noted that the progress of the kharif sowing season is a critical factor for reducing food inflation, which can be controlled by a good harvest in the kharif season. They added that globally, commodity prices, which had been rising through the first half of 2024, have eased over the past month. However, external risks emerging from ongoing geopolitical tensions need to be monitored, given the risk they can pose to supply chains and commodity prices.

"Looking ahead, a favorable base effect is expected to persist until July 2024, helping absorb potential upward risks to price pressures to a certain extent. We expect food inflation to moderate going ahead as the base effect plays out and new harvests arrive in the market. For FY25, we expect inflation to average 4.8 percent. If food inflation moderates, we expect the RBI to cut the policy interest rate by a shallow 50 bps in two tranches in the second half of the fiscal year," said Rajani Sinha, Chief Economist at CareEdge Ratings.