Inflation relief for now, risks aplenty

Consumer price index (CPI) inflation cooled to 5% in September from 6.8% in August and its 7.4% peak in July. The elevated inflation since July - and also the relief in September - were led by volatility in vegetable inflation, which rose to 37.4% in July and fell to 3.4% in September. Some softness in milk inflation and continued deflation in edible oils also aided the decline in headline inflation.

There was comfort from non-food inflation components, which have stayed benign so far, supported by a high base of 6.2% in September 2022 and lower raw material costs.

That said, some risks still loom large.

First, not all the components of food inflation provided comfort. Inflation in pulses1 surged to 16.4% and in cereals, was uncomfortably high at ~11%, reflecting adverse impact from weather shocks. Further, inflation in pulses, eggs, meat and fish rose to 8.3% in September from 6.8% in August a low of 0.8% in March.

Second, rising oil prices - fuelled by the Middle East conflict - can pressure, or at least limit, the easing in non-food inflation components, which played a crucial role in lowering headline inflation. Government intervention (such as the recent cuts in liquefied petroleum gas (LPG) prices), however, can cushion the impact.

Inflation for the September quarter rose to 6.4% - as predicted by the Reserve Bank of India (RBI) - from 4.6% in the June quarter. For the December quarter, we expect food inflation to soften, helped by the kharif harvest entering the market and government intervention in food prices. However, inflation in pulses and cereals could see limited respite; further, oil could play spoilsport if the Middle East conflict escalates.