Breaching the target: On India’s retail inflation

India’s retail inflation breached the RBI’s 4% target for the first time under the new CPI series, rising to 4.38% in June from 3.93% in May and about 2.7% a year earlier. The latest print reflects a broader pass-through of price pressures that had, until recently, remained concentrated at the producer level, largely driven by spiralling transport and fuel costs since the U.S.-Iran conflict in late February. Consequently, the gap between wholesale and retail inflation has only marginally narrowed. Wholesale inflation (WPI), now based on 2022-23, remained elevated at 9.87% in June, up from 9.68% in May. Fuel and power continued to exert the greatest pressure on producers, recording inflation of 27.41%, only marginally lower than May’s 28.18%. As India imports nearly 90% of its crude oil requirements, the value of merchandise imports surged to $70.8 billion in June from about $54.1 billion a year earlier, even though import volumes did not rise proportionately. This underscores how imported inflation, amplified by crude prices that briefly crossed $110 a barrel, has driven systemic price pressures across the economy. The rupee’s sharp depreciation during the conflict added to these pressures, although RBI intervention in the foreign exchange market helped cushion the fall.

The transport category merits closer examination. Transport inflation more than doubled to 4.31% in June from 1.75% in May, while the sub-group, “transport services for goods”, remained elevated, rising to 7.70% from 7.63%. Another notable pressure point has been restaurants and hotels. Although the government announced a modest reduction in commercial LPG prices earlier this month, it has done little to offset the steep increases through May and June, when the price of a 19.2 kg commercial cylinder in Delhi climbed to around ₹2,930 before easing marginally. The system-wide impact is also evident in food prices, with the Consumer Food Price Index (CFPI) rising to 5.32% from 4.78% in May. Another significant price pressure on the CFPI that must be factored in is the projection of a deficient southwest monsoon and its impact on agriculture, though the extent will become clearer in the weeks ahead. Meanwhile, despite the Centre more than doubling import duties on gold and silver from 6% to 15% in May, Commerce Ministry data suggest that bullion imports have remained robust amid global uncertainty, contributing to higher jewellery prices and household inflation. Although the ceasefire announced in late June briefly eased crude prices, they have begun rising again. Given continuing geopolitical uncertainty and persistent upstream price pressures, inflation is unlikely to return to the RBI’s 4% target soon, leaving no room for a rate cut at the Monetary Policy Committee’s August meeting.