India’s May retail inflation at 3.93%, the highest in the current CPI series and roughly a 15-month high if compared with the previous series, has begun to reflect the pass-through effects of surging food and fuel costs more clearly than in previous months. However, last month’s wholesale inflation numbers, the first under the new WPI series and due later this month alongside India’s first Producer Price Index (PPI), should reveal how much of the price shock producers and wholesalers continue to absorb. May’s food inflation rose at a faster clip to 4.78% from 4.20% in April. While transport inflation rose by 1.75% after a marginal contraction in April, a subdivision within the sector — transport services for goods — surged by 7.63%, signalling growing price pass-through. This was largely driven by the four tranches of petrol and diesel price increases beginning in mid-May. Significantly, the sharp rise in commercial LPG prices — by about ₹1,300 per 19-kg cylinder, representing an increase of over 75% since February — appears to be reflected in inflation in the restaurants and accommodation services category, which stood at 5.75%, the second-highest division after personal care and miscellaneous goods and services. Inflation in the latter category reached 18.46%, reflecting soaring precious metals prices. Domestic LPG’s second price revision by ₹29 earlier this month will likely find a fuller expression in June’s consumer food price inflation.

Although May’s inflation remains below the RBI’s 4% target and within its 2%-6% tolerance band, the RBI retained its neutral stance at its latest monetary policy review, signalling concern over the possibility of further price pressures. Its intervention in the foreign exchange market through dollar sales has meanwhile helped shore up the rupee, Asia’s worst-performing currency since the U.S.-Israeli conflict with Iran escalated. The currency, which briefly approached ₹97 to the dollar in May, is now trading closer to ₹95-₹96. The Centre may nevertheless draw some comfort from the fact that core inflation, which excludes food and fuel, remained relatively contained at around 3.8%-3.9% in May, largely unchanged from recent months. This coincides with signs of a U.S.-Iran rapprochement and uninterrupted shipping through the Hormuz. Yet, uncertainty persists over whether Iran may impose fees or restrictions on transit through the waterway, which could keep fuel prices elevated for energy-importing nations such as India. Even if crude prices soften, oil marketing companies are unlikely to immediately reverse retail price increases as they seek to recover losses. LPG prices, too, may remain sticky. Thus, while the prospects for a durable peace may have improved, a rapid decline in inflation appears unlikely.