The July Consumer Price Inflation(CPI) climbed to 2.36% YoY following a record low of 1.54% YoY in June. This jump in CPI is almost entirely attributable to the tomato price shock, that rose by 138% MoM due to heavy monsoon rainfall and abating supply. Excluding tomatoes, CPI inflation was largely unchanged from the last month at 1.9% YoY. (Refer Fig. below). The core CPI (CPI ex food and fuel) was also similar at 4% YoY from 3.9% YoY last month
Even the Wholesale Price Inflation(WPI) witnessed similar trend where headline WPI came in at 1.9% YoY vs 0.9% YoY last month, however excluding tomatoes WPI was unchanged at 1.1% YoY.
The price trends for August also suggest that this price shock is spreading to onions as well. Historically, a price shock in perishables during the monsoon season generally normalizes once the supply resumes after the end of monsoons and start of winter.
Increase in July CPI entirely due to tomatoes price shock (% YoY)
Source: Citi Research, CEIC, CSO.
The minutes of the 3rd Bi-monthly Monetary Policy Committee meeting that were released recently, highlight that there was a consensus among members about the current level of CPI inflation being unsustainably low and that it was set to rebound. The perishable price shock (tomatoes last month & now onions) is a vindication of their cautious stand. With the assumption that the prices of tomatoes (and other perishables) will normalize in 3-5 months time, as supply resumes, this price shock should not derail further rate cut hopes. However, Citi economists believe that till such time the evidence of price normalization emerges, RBI is likely to maintain its cautious approach.
Given the rising prominence of growth risks in the MPC narrative, Citi economists believe that the space for 25bps rate cut will open up in the Jan-Mar 2018 quarter, when the headline CPI would stabilize around 4% (assuming the veggie prices normalize during the winter months).