Food still driving inflation, but sees relief in August

The Consumer Price Index (CPI)-based inflation softened to 6.8% in August, after surging to 7.4% in July. While the non-food components stayed unchanged, a slight moderation in food inflation pulled down the headline number.

Where is the comfort: Inflation in all commonly constructed non-food CPI categories remained low and unchanged from July: non-food CPI at 4.8%, core CPI (excluding food and fuel) at 4.9%, services CPI at 4.5% and core CPI goods (excluding food and services) at 5.1%.

Where is the discomfort: Food inflation falling off its peak provided relief, but not comfort. At 9.9%, food inflation was driven by vegetables inflation at 26.1%, cereals inflation at 11.9% and pulses inflation at 13%, though all these heads displayed moderation in inflation compared with the previous month. We expect a correction in vegetables inflation in the coming months, but some rigidity in cereals and pulses inflation.

Fuel inflation was benign at 4.3%, but can face upside risks if the recent spike in crude prices sustains.