Retail inflation increases to 6.21% in October, reaching a 14-month high

India’s retail inflation has unexpectedly surged to a 14-month high, climbing to 6.21% in October from 5.49% in September 2024, largely due to a steep rise in food prices, which have contributed to the overall inflationary spike. This unforeseen jump reflects broader inflationary pressures that are impacting rural and urban areas differently, highlighting regional disparities in cost-of-living increases. Rural inflation notably rose to 6.68%, significantly higher than urban inflation, which registered at 5.62%. With rural inflation surpassing urban rates, this reversal was not widely anticipated, as rural areas typically experience lower inflation than urban counterparts. This shift underscores the widening economic gap between rural and urban sectors, signaling potential challenges for policymakers in addressing region-specific inflation dynamics.

The October spike marks the first time inflation has breached the Reserve Bank of India’s (RBI) 6% upper tolerance threshold in over a year, with the last breach occurring in August 2023. This comes shortly after inflation exceeded the RBI’s medium-term target of 4% in September, the first instance since July. According to data released on Tuesday, India’s retail inflation stood at a comparatively lower 4.87% just a year ago.

A measure called the Consumer Price Index (CPI) evaluates the weighted average cost of a typical basket of goods and services for consumers, such as food, transportation, and healthcare, revealing heightened inflationary pressures. Inflation in food, which accounts for about half of the CPI basket, jumped to 9.69% in October, up from 9.24% in September. The CPI data indicates that inflation in rural areas rose from 5.87% to 6.68%, while urban inflation increased from 5.05% to 5.62% over the same period. This total rise underscores the pervasive and rising expense of living, particularly in rural areas, and the pressing need for focused governmental actions to reduce inflationary effects on essential commodities and services.

Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank said, “The sharply higher than expected CPI inflation has largely been led by surge in vegetable prices but also a sharp pickup in core inflation. We expect the uptick in food prices to keep the headline inflation higher than 5% even in the next reading before seasonal downturn begins to bring down inflation. We expect the RBI to stay on hold in the upcoming December policy before considering a cautious easing from February.” The RBI, as India’s central bank, plays a crucial role in managing the country’s monetary policy and is responsible for controlling inflation. Bhardwaj’s comments suggest that the RBI may adopt a cautious strategy in light of the growing rate of inflation, potentially delaying any further interest rate cuts until early 2025.

Chief Economist and Executive Director Sujan Hajra of Anand Rathi Shares and Stock Brokers remarked that the inflation rate for October 2024 was considerably higher than their initial estimates, highlighting a much stronger-than-expected rise in prices. This surge was particularly notable in essential sectors such as food and rural areas, where inflation outpaced urban inflation, signaling broader economic pressures. He emphasized that the unexpected jump in inflation may have significant implications for future monetary policy and could challenge efforts to keep inflation within the Reserve Bank of India’s target range.

“The rise was driven by food products particularly the vegetables rising above 42% y-o-y. While the components of the core saw some uptick, the current inflation trajectory is guided by food inflation. The numbers for the last 2 months remaining above the RBI’s target level of 4% has further receded the rate cut expectations in next month. This is consistent with our view that the rate cuts will begin only at the beginning of 2025. We believe that the good monsoon and better rabi harvest shall result in lower food price volatility in next quarter,” he added.