DNA Money Edit: To rein in CPI, govt needs to be vigilant on food inflation

Retail inflation (consumer price index or CPI-based inflation) rose to a 5-month high of 3.36% in August, up from 2.36% in the previous month, mostly on expected lines. Food inflation has turned positive. Within the food category, vegetables saw prices rising at the rate of 6.16%, against a price fall of 1.67% in July, though tomato prices tumbled. The core inflation jumped to 4.6%, which reflects the impact of the goods and services tax roll out. As the prices of petrol and diesel steadily rise, freight rates have seen a direct increase. The revision in HRA of central government employees is likely to push up housing inflation further. Analysts are of the opinion that the CPI inflation is expected to harden further in September, led by food and beverages, transport, communication and housing. It may cross the Reserve Bank of India's (RBI) comfort zone of 4% by November.

This possibility has, in effect, dampened the chances of a lower interest rate regime in the coming months. The central bank had reduced the repo rate by 25 basis points to 6% in August, citing a reduction in inflation risks. But with the two consecutive months of July and August reporting jump in CPI, the RBI is unlikely to slash the rates further. On the flip side, though the Index of Industrial Production (IIP) rebounded to a growth of 1.2% in July, there are concerns over the slow-paced growth and stagnant manufacturing volumes despite restocking of inventories in the GST regime.

The government needs to tighten the loose ends that lead to food inflation. It is critically important for the government to handhold the food economy in order to keep CPI under control.