India inflation seen up in June due to soaring vegetable prices

Prices of tomatoes, onions, and potatoes – staples in every Indian kitchen – surged by double digits last month as extreme heat and heavy floods in India’s northern states disrupted agricultural production.

The July 5-9 Reuters poll of 54 economists forecast consumer price inflation rose to 4.80% last month on a year earlier, up from 4.75% in May. Food accounts for around half the overall CPI basket.

Forecasts for the data, due on July 12 at 1200 GMT, ranged from 4.10% to 5.19%.

“A sharp spike in vegetable prices along with cereals and pulses kept food inflation at higher levels and nullified the softness in eggs, fruits, and spices prices,” said Kanika Pasricha, chief economic advisor at Union Bank of India.

“Core inflation likely stayed flat at all-time lows of 3.10% as gold prices eased somewhat during the month and commodity prices also remained under pressure.” Core inflation, which excludes volatile items, such as food and energy and is seen as a better gauge of domestic demand, was forecast to be 3.10% in June, according to the median estimate from a smaller sample of 19 economists. The Indian statistics agency does not publish core inflation data, but economists estimate the figure based on CPI data and some may publish their updated estimates after Friday’s release.

Many economists say despite the economy growing by more than 8% last fiscal year, the recent decline in core inflation indicates overall weak domestic demand in an economy where private consumption accounts for nearly 60% of GDP.

Some also said a telecommunications tariff hike effective from this month is likely to exert upward pressure on inflation over the coming months, arresting a further fall in core CPI.

“Given the weight in the CPI basket (for telecoms) and past translation trends, this should push up headline CPI by another 20 bps or so, starting July,” said Sajjid Chinoy, chief India economist at J.P. Morgan.

“To the extent that this is a one-off price hike, the RBI should look through this. But again, it adds to the uncertainty of the inflation outlook.”

With inflation expected to stay above the Reserve Bank of India‘s 4% medium-term target this fiscal year and next, the central bank is forecast to cut rates just once this year, next quarter.

The U.S. Federal Reserve is forecast by economists to begin its easing cycle in September.

Wholesale price index-based inflation likely surged to an annual 3.50% last month from 2.61% in May, the survey showed.