Retail inflation in July is expected to cool down to a three-month low, bringing it back within the Reserve Bank of India’s (RBI) target range of 2-6 per cent.

Retail inflation, measured by the consumer price index (CPI), had shot up to 6.30 per cent in May and slightly cooled to 6.26 per cent in June.

Retail inflation in July is expected to ease on falling food prices and easing of supply chain disruptions, according to a poll conducted by news agency Reuters.

The poll of 48 economists showed CPI eased to 5.78 per cent. It would be the lowest inflation recorded since May and just below the RBI’s upper target band of 6 per cent.

FACTORS BEHIND POSSIBLE INFLATION DIP

The predicted fall in inflation is largely due to a dip in lower food prices. An economist who spoke to the news agency noted that there has been a material drop in edible oil and palm oil prices after tariff reductions. The easing of global oil volatility has also helped.

On the other hand, improving the supply chain situation has played a crucial role in lowering prices of some commodities.

While inflation is likely to ease to a three-month low, the trajectory will remain high due to the underlying core pressures. Record high fuel prices are also likely to push inflation higher.

VOLATILE INFLATION OUTLOOK

The inflation outlook for the year also remains volatile as the central bank had raised its inflation forecast for the fiscal year 2021/22 to 5.7 per cent at its monetary policy meeting last week.

Despite improving supply chains, companies are facing higher input costs across many segments. This is why wholesale inflation has remained in double digits for the past few months.

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It may be noted that retail Inflation will rise sharply if companies decide to pass on higher costs to consumers.

If inflation rises in future, it could have a dampening effect on the economy as well. The RBI has kept key interest rates low and maintained an accommodative stance for a prolonged period to aid economic recovery.

Higher inflation would lead to a situation where the RBI is left with little choice but to hike the key rates. This would not only hurt overall economic growth but also impact the ongoing stock market rally.

The inflation and growth outlook will also depend on the evolving pandemic situation in the country and pace of vaccinations.