InvestorQ : Why did the rate of inflation for the month of July 2020 come in so sharply higher?
Arya Nanda made post

Why did the rate of inflation for the month of July 2020 come in so sharply higher?

Anjana Aiyar answered.
8 months ago

We are back to the famous inflation puzzle. If inflation is high, how will the RBI cut rates? If the RBI does not cut rates, then how will production improve in the country? If production does not improve, then how will inflation come down? Let us get back to the point now.

CPI inflation for the month of July 2020 came in sharply higher at the rate of 6.93%. That is nearly 75 bps higher than the estimates put out by Reuters. What is more, the MOSPI also upped the inflation for June from 6.09% to 6.23%. But, why was it so sharply higher?

The trigger for higher inflation was food inflation. The food basket is nearly 50% of the overall CPI basket and hence has an oversized impact on retail inflation. Food index for July was up 9.62% causing a sharp spike in overall inflation. The spike was visible in pulses, meat, dairy and cereals.

The second major reason for this spike in inflation was core inflation. Now core inflation is the inflation net of food and oil. Core inflation shot up to 5.91%, a sharp spike of over 100 basis points on a sequential basis. Core inflation is stickier and more difficult to address.

Now for the real cause of higher inflation! It is not demand; because demand continues to be weak post the pandemic. The pressure has, therefore, come from supply chain bottlenecks which could mean that inflation will persist till this issue is addressed.