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Inflationary pressure back after GST roll-out

Inflationary pressure back after GST roll-out
Amid concerns over deflationary impulses expressed in the second volume of the Economic Survey 2016-17, the retail inflation rate rose to a three-month high of 2.36 per cent in July, against the record low of 1.5 per cent in June due to the impact of the goods and services tax (GST) rates for some services and the revision in house rent allowance (HRA) for central government employees.
However, as the Survey had pointed out, food prices continued to fall, though at a lower rate at 0.3 per cent in July, compared to the 2.1 per cent in June.
In the remaining months of the current financial year (FY18), economists expect the retail inflation rate to rise, which might discourage the Monetary Policy Committee (MPC) from cutting rates further, despite the Survey recommending monetary easing. 
However, the wholesale food inflation rate was 2.1 per cent in July, against a fall of 3.5 per cent in June and 2.1 per cent in May.
Since wholesale prices are the lead indicators, this may have repercussions on retail food inflation in the coming months.
Overall, the wholesale price index (WPI) rate doubled to 1.88 per cent in July, against 0.9 per cent in June. 
Vegetables, some of which such as tomatoes are witnessing huge price pressure, saw retail prices falling by 3.6 per cent in July, much lower rate than the 16.5 per cent in the previous month. “The (CPI) Consumer Price Index (retail) rate rebounded in July on account of vegetable prices, the revision in HRA and, to some extent, higher GST on various services,” says Aditi Nayar, principal economist, Icra.
In terms of wholesale prices, the situation was the opposite with vegetables. While in June, the WPI rate declined 21.16 per cent, the index rose 21.95 per cent in July.
In WPI, vegetable inflation was led by the 209.6 per cent increase in tomato prices. Potatoes and onion continued to see deflation or fall in prices. On the retail price index, the housing inflation rate rose to 4.98 per cent in July, against 4.7 per cent in the previous month due to an upward revision in HRA for the government employees.“The impact of the revision in HRA of central government employees on the housing index of the CPI is likely to push up housing inflation further,” says Nayar. 
The household goods and services inflation rate was up at 3.9 per cent, against 3.8 per cent in the previous month. Education services saw the inflation rate rising to 4.5 per cent in July, from 4.3 per cent in the previous month. Nayar says as the favourable base effect wears off, vegetable prices record a seasonal hardening and the impact of HRA pushes up the housing inflation rate, the retail inflation rate is likely to ramp up over the next few months, and cross 4 per cent by October. 
“Based on this anticipated trajectory, and the recent commentary by the MPC, we see a low likelihood of rate cuts in FY2018,” says Nayar. The impact of the GST on manufactured products was not much seen as the WPI rate for this category declined to 2.18 per cent in July from 2.27 per cent in the previous month.
“The doubling of the wholesale inflation rate in July cannot be seen in terms of the impact of the GST. Prices of manufactured products fell in July,” says Devendra Pant, chief economist, India Ratings. 
The Business Standard, New Delhi, 16th August 2017


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