Tricky query on inflation that everyone ducks
US Federal Reserve will tread carefully while balancing these risks and prefer to stay on hold for long—reinforcing higher for longer approach. Meanwhile, given higher inflationary pressure in Europe, we expect the European Central Bank to hike by 25 basis points and the Bank of England by 50-75 basis points . A basis point is one-hundredth of a percentage point.
Notably, while the monetary tightening is approaching its last leg, we do not foresee a rate cutting cycle in the near future, given that the fight against inflation is far from over. As the global uncertain environment unfolds, the members of the Reserve Bank of India’s monetary policy committee in the upcoming meeting face additional domestic challenges. The headline consumer price inflation is expected to surge above the monetary policy committee’s upper threshold limit of 6% for the first time in five months (Kotak estimates at 6.43% compared to 4.81% in June), with vegetable prices being the key miscreant.
Besides vegetables, continued upside pressure on prices of cereals and pulses remains a point of stress. We, thus, expect the food inflation to surge to 9.4% in July compared to 4.5% in June. The food inflation is expected to further inch higher into double digits in August, pushing the headline CPI figure to around 7%.
Providing some comfort to the monetary policy committee will be the moderating trend of core inflation, which has been benefitting from a favourable base effect and lagged pass-through of the easing global commodity prices. We expect the July core inflation to slip to sub-5% for the first time in three years. More so, the CPI inflation excluding vegetables is expected to remain steady at around 5.1% in July compared to 5.2% in June.
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