Prices Rise, Will Rate Follow? Core Inflation Soars to 7 year high

The inflation monster has risen, the question that markets are asking is will it really spook the RBI enough to raise rates.

Inflation at the retail level, the barometer the RBI follows surged to a 6-month high of 6.3% in May. This was much ahead the street expectation of 5.3% and the breaching the RBI's comfort zone of 4-6%. The worrying signal came in from core inflation that shocked with a seven year high print of 6.6%. The momentum in headline CPI was more than thrice the last 3-year average. This print is worrying economist as the inflation print seems to be reflecting price rise over and above the impact of the lockdown as per a report by Citigroup who have now raised their inflation target for the year to 5.9%.

The pass through effect from the wholesale numbers has been stronger than anticipated. WPI inflation touched 12.94 per cent in May, the highest on record, as the constant rise in the cost of fuel, including petrol, LPG and high-speed diesel percolated down into the economy and a low base effect pushed up figures.

The question now is should consumers be worried about a rate rise? RBI has been focused on growth stability over the pandemic but the worry of large spurts of inflation may push the central bank into normalising policy earlier than anticipated, writes Citigroup who thinks that we should expect a 'neutral stance' from Mint Street by this Diwali.