Economy
Mint Primer All about the inflation spike: how, why when
Summary
- Despite the RBI governor Shaktikanta Das’s warning of higher inflation in October, the 6.2% reading, which marks a 14-month high, came as a surprise.
The consumer price index (CPI)—or retail inflation—surged in October to 6.2%, breaching the Reserve Bank of India’s (RBI) upper tolerance limit. Mint looks at what caused this spike, its expected trajectory in the coming months and what it means for interest rates.
How surprising was the spike in inflation?
Despite the RBI governor Shaktikanta Das’s warning of higher inflation in October, the 6.2% reading, which marks a 14-month high, came as a surprise. It was 5.5% in September. For the first time in 13 months, the inflation breached the 6% mark—the higher end of the RBI’s inflation target. It is the highest since August 2023, when inflation was 6.83%. This time around, the rural inflation at 6.7% is much higher than urban areas, which registered a price increase of 5.6%. Even though inflation is being tamed globally, India is one of those economies where pricing pressures still persist.
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What has caused this sudden spike?
The main reason for this surge is food inflation, which touched a 15-month high of 10.9%. The sharp rise in the prices of vegetables, fruit, edible oil and pulses contributed to the jump in food inflation. Vegetable prices rose by 42% in October—marking a 57-month high. The price of fruit rose by 8.4% and that of pulses by 7.4%. Excessive rainfall is being attributed for the lower supplies of fruit and vegetables in the market and the consequent price rise. Edible oil prices increased by 9.5% in October due to supply disruptions in Southeast Asia, which saw global edible oil prices rise by 27%.
What was the inflation projection like?
The RBI had projected an average inflation of 4.8% in the October-December quarter and 4.2% in the fourth quarter. The estimates are now expected to be revised upwards. For RBI’s projection to hold, retail inflation should drop sharply to 4.1% in November and December. The full year FY25 inflation, so far, is 4.85%—higher than RBI’s forecast of 4.5%.
Any chances of a quick fall in prices?
With better arrivals, some food prices will begin easing. But the decline in food inflation will be gradual because prices of fruit and vegetables will take some time to ease. Edible oil prices will remain high because of supply constraints. Apart from food, services inflation and core inflation (excluding food and energy prices) rose too. Core inflation was at a 10-month high. This should worry policymakers and monetary authorities. Economists expect retail inflation to cool down a bit in November to somewhere between 5.5% and 6%.
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What about interest rate cuts?
Until the release of CPI data, there was hope that the monetary policy committee, which sets benchmark interest rates, would start cutting rates from December. That hope has now been extinguished as inflation is above RBI’s comfort zone. Experts now expect rate cuts to happen sometime in the first quarter of 2025. A few of them expect a shallower cut as the strengthening of the US dollar post Donald Trump’s re-election and consequent weakening of the rupee could push up fuel prices—and inflation—going forward.
