Fuel Prices, Milk Shortages and Rising Gold Costs May Drive Retail Inflation Above RBI's 4% Target

India's Retail Inflation on the Rise: Fuel, Milk, and Gold Prices to Push Inflation Above RBI Target

India's retail inflation is expected to surge by up to 60 basis points (bps) in the coming months due to rising fuel, milk, and gold prices, according to a Moneycontrol analysis. This increase would push inflation above the Reserve Bank of India's (RBI) medium-term target of 4 percent.

Inflation has already begun to inch up, with consumer price inflation rising to 3.48 percent in April from 3.40 percent in the previous month. Food inflation accelerated to 4.2 percent from 3.87 percent, with milk prices expected to be the biggest contributor to headline inflation. Milk and milk products carry a weight of 6.7 percent in the Consumer Price Index (CPI), making them one of the most influential food categories.

Milk Prices to Add 21 Basis Points to Headline Inflation

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Milk prices have already increased, with prices going up Rs 2 a litre earlier this week. The impact of rising milk prices is expected to add around 21 basis points to headline inflation. This is significant, given the weight of milk and milk products in the CPI.

Fuel Prices to Add 16 Basis Points

Fuel prices are also on the rise, with the direct impact of petrol and diesel reflected in the CPI's 5.03 percent fuel and light category. The recent hike in petrol and diesel prices by Rs 3 a litre on May 15 is expected to add another 16 basis points to headline inflation.

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Gold Prices to Add 9 Basis Points

Gold prices could also add a further 9 basis points to inflation. Gold and silver carry a weight of 0.936 percent in the CPI basket, and sharp increases in bullion are already feeding into jewellery and other personal effects. The recent hike in import duty on gold and silver to 15 percent from 6 percent is expected to further increase gold prices.

Impact on Inflation

The combined impact of fuel, milk, and gold prices is expected to raise inflation by roughly 0.61 percentage points. If fully reflected in consumer prices, headline inflation could move from April's 3.48 percent to around 4.09 percent, taking it above the RBI's target. However, this is still within the RBI's 2-6 percent tolerance band.

The findings suggest that inflation risks are becoming broad-based, with higher milk prices, costlier fuel, and surging jewellery prices pushing inflation back above the central bank's comfort level. Even if food prices remain relatively stable, these factors could still push inflation above the RBI's target.