India’s retail inflation accelerated for a second consecutive month in May to touch its highest level in 21 months as food prices surged, government data showed on Monday.
Consumer prices increased by an annual 5.76% in May from April’s revised 5.47%, the data showed. Retail inflation was last higher than May’s level in August 2014 when it came in at 7.73%. Food inflation in May rose to 7.55% from 6.40% in April.
The data adds weight to the Reserve Bank of India’s (RBI) concerns on inflation that prompted it to keep its benchmark interest rate unchanged last week. Consumer inflation is a key metric that the RBI tracks to decide interest rates.
The RBI has set a target for retail inflation at 5% by March 2017, and has said that it could cut interest rates if prices nudge down. An uptick in inflation, however, will make it difficult for RBI governor Raghuram Rajan to cut rates at the next policy review on August 9.
While retail inflation has edged up, it remains far below the 10-11% level when Rajan took over as the RBI chief in September 2013. Rajan has been at the centre of a public debate in recent weeks on whether the government will extend his tenure when it expires in September.
Inflation trajectory in coming months will depend a lot on monsoons, which is critical for the farm economy. India has received below-normal rainfall for two years in a row, leading to a drought in several areas, but this year’s forecast is for normal to above-average showers.
While poor rainfall in the past two years has depressed rural wages and demand, rural inflation has been on an uptick. In fact, rural inflation has been higher than urban inflation in the recent months. In May, rural inflation came in at 6.45% while urban inflation was 4.89%.
Other factors that threaten to push inflation higher in coming months are a rise in crude oil prices—India imports three-fourths of its crude oil requirement—and a new tax on some services that India imposed from June 1 to help the farm sector. An increase in salaries of about 50 lakh government employees from January as per the recommendations of the seventh pay commission is also expected to push inflation higher.
Data released on Monday showed also that fuel prices in May rose an annual 2.94%. Among food items, prices of pulses jumped 31.57%% while that of sugar rose almost 14% and of vegetables climbed 10.77%.
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