National headline inflation for July 2024 expectedly clocked in at 11.1 percent year-on-year – a 33-month low as high base from last year remains in play. On a month-on-month basis, both urban and rural inflation are at multi-month highs. Urban month-on-month inflation at 2 percent is the biggest jump since November 2023, whereas rural at 2.2 percent is the highest in September 2023.
In terms of composition, the focus has gradually shifted from food to non-food – more pronounced in the rural setting, where weighted contribution of non-food items to inflation is 98.5 percent. Month-on-month food inflation in urban settings at 5.3 percent is the highest in 22 months and at 4 percent in rural settings at a 16-month high.
The increase in perishable food prices such as fresh vegetables and tomatoes is largely cyclical and is expected to recede in the coming months. It is the uptick in non-perishable food prices, that constitutes the chunk of food basket, that is of note, after months of month-on-month respite. Wheat flour price increase month-on-month at 8.5 and 8.2 percent is the highest in 12 months, in rural and urban settings, respectively. Time will tell if this is a one-off or the start of a trend.
Fresh milk, with the single-largest weight in the food basket in both urban and rural settings, had the largest weighted contribution for July 2024. The budgetary measures of imposing sales tax on packaged milk were always going to move the needle in the loose milk market. The month-on-month increase in fresh milk prices at 5.3 percent in urban markets is the highest in 25 months and is likely to keep food inflation honest in the coming months.
The biggest respite came from electricity prices as the government delayed the imposition of revised tariff by a quarter for consumption up to 200 units in both protected and unprotected categories. This makes up for more than 80 percent of all domestic consumers. A sharp reduction in quarterly tariff adjustment from Rs4.6/unit in June 2024 to just Rs0.93/unit in July 2024 meant effective tariffs for four of the five consumption quintiles went down month-on-month. From October onwards, electricity price adjustments will be considerably higher, notwithstanding periodic adjustments, as the Prime Minister’s Rs50 billion relief package will come to an end.
The most interesting observation is around the treatment of house rent index – that is shown to have grown by 0.97 percent month-on-month. Recall that the PBS revised the house rent index values every quarter, and July’s increase is the lowest in almost seven years (excluding peak Covid 4QFY20). House rent has the single-largest weight in the entire urban CPI basket at 19.2 percent and the lowest increase in seven years has surely played a part in keeping inflation in check. How close to ground reality is the house rent treatment by the PBS is open for debate.
Non-food non-energy core inflation has also cooled off to 11.7 percent and 16.9 percent for urban and rural settings, respectively – both at multi-month lows. With the budgetary measures related to higher taxation in a host of sectors, core inflation is expected to remain sticky. With the IMF program round the corner, higher taxes on petroleum are just a matter of time, even though the government has so far delayed the imposition of higher Petroleum Levy. With the situation in the Middle East closest to a full-blown war, oil prices could take an ugly turn and that could throw the spanner in the works. For all practical purposes, single-digit inflation may still take a while, as opposed to the Finance Minister’s optimism of being on the cusp.
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