Rising Inflation in 2024: Analyzing the Key Drivers and Impacts

The Indian economy is facing a growing challenge as retail inflation hit a four-month high of 5.1% year-on-year (YoY) in June 2024. This increase marks a significant rise from the 4.8% recorded in May and the 4.9% observed in June 2023. The primary contributor to this inflationary trend is the steep rise in food prices, which have reached a six-month peak. Despite the stable performance of core inflation at historic lows and a continuous deflation in fuel prices, the overall Consumer Price Index (CPI) has witnessed a notable upward shift. For the first quarter of FY25, CPI inflation averaged at 4.9%, marginally exceeding the Reserve Bank of India’s (RBI) projection of 4.5%.

The Surge in Food Inflation: A Key Contributor

Food inflation has emerged as the most significant driver of overall inflation, soaring to 8.4% in June. This represents a sharp increase from the 7.9% seen in May and the 4.7% recorded in June of the previous year. Several factors have contributed to this surge, most notably the dramatic price hikes in essential food items such as vegetables, pulses, and cereals. Key food products like tomatoes, onions, and potatoes have seen YoY price increases of 26.4%, 58.5%, and 57.6%, respectively. These substantial price escalations can be largely attributed to adverse weather conditions, including extreme heat and a deficient monsoon, which have significantly reduced crop yields.

In addition to vegetables, the inflation rate for fruits has also increased, reaching a five-month high of 7.2% YoY. Despite the ongoing deflation in the oils and fats category, which has been on a 17-month downward trend, the rate of deflation has slowed down, adding further pressure to the overall inflation figures.

Core Inflation: Stability Amid Rising Prices

While food inflation has been on the rise, core inflation, which excludes volatile food and fuel prices, has remained steady. In June 2024, core inflation held firm at 3.1%, the same rate as in May, and down significantly from the 5.1% recorded in the previous year. However, within the core inflation category, some sub-sectors have shown notable variations. For example, personal care items have experienced a nine-month high in inflation at 8.2%, driven primarily by rising gold and silver prices. In contrast, other categories such as housing and clothing have seen minimal fluctuations. Housing inflation increased slightly to 2.7%, while inflation in clothing and footwear dropped to a four-year low of 2.7%.

Wholesale Price Index (WPI) Trends: An Upward Shift

The Wholesale Price Index (WPI), another critical measure of inflation, has also shown signs of acceleration. In June 2024, wholesale inflation surged to a 16-month high of 3.4% YoY, up from 2.6% in May. This rise is partially due to a low base effect from June 2023, coupled with significant inflation in food articles. However, the impact of this increase was somewhat moderated by sluggish inflation in the fuel and manufacturing sectors.

In the manufacturing sector, there was a notable shift as inflation turned positive for the first time in 15 months, rising to 1.4% YoY. Within the manufacturing segment, food products saw a growth of 4.3%, again largely due to a low base effect from the previous year. However, inflation in other manufacturing categories such as basic metals and chemicals remained subdued, reflecting the mixed dynamics at play in the sector.

Additionally, crude petroleum and natural gas prices spiked to a nine-month high of 12.6% YoY, driven by a low base effect, further contributing to the overall inflationary pressures within the wholesale sector.

Conclusion: Navigating the Inflationary Landscape

The upward trend in retail and wholesale inflation in mid-2024 highlights the complex and multifaceted nature of inflationary pressures in the Indian economy. While food inflation continues to be the primary driver, the broader economic environment is influenced by a range of factors, including weather conditions, global commodity prices, and base effects. As core inflation remains stable and fuel prices continue to deflate, the overall rise in CPI and WPI suggests that the economy is facing significant inflationary challenges.

For policymakers, businesses, and consumers, understanding these dynamics is crucial for navigating the inflationary landscape. With the RBI’s forecast slightly off the mark, there is a need for close monitoring of inflation trends in the coming months. As the economic environment remains volatile, staying informed and prepared for potential fluctuations will be key to managing the impacts of inflation on the broader economy.