The fact that inflation in July is apprehended to be higher than in June, is known, hence mostly priced in by markets.

In June 2023, consumer price index (CPI) inflation was 4.8%, higher than 4.3% of May 2023. Vegetable prices were up-ish, which, along with other items in the inflation measurement basket, pushed it up. In July, vegetable prices, in particular tomato prices, were even higher. This, and other components of inflation, would push it up further. The data will be announced on August 12. Higher inflation is a negative for markets, both equity and bonds. However, you need not be too concerned about rising inflation; there are mitigants.

The fact that inflation in July is apprehended to be higher than in June, is known, hence mostly priced in by markets. On announcement, there would be some more market reaction, but limited. The other aspect the market would watch out for, is the Reserve Bank of India (RBI) policy review meeting on August 10. For the current quarter, July-September, RBI’s inflation projection is 5.2%. Possibly, these projections would be revised slightly upwards on August 10, as vegetable prices are higher than expected. From the market’s perspective, whatever be the projected number, it will give a clue.

Inflation Measurement

In the CPI inflation measurement basket, almost half is comprised of food and food related items. For food output, monsoon is an important variable. This season, while monsoon has been a concern, it is not as big a concern as it may seem apparently. While we are predominantly dependent on rainfall, the irrigated area is higher than earlier. Levels in water reservoirs are higher than corresponding period in earlier years. That is, any negative outcome of the monsoon would be mitigated to an extent.

To look at the internals, crop plantation area in pulses was lower than earlier. Rice is the major kharif crop, where area cultivated is higher, till July 21. Crop plantation area is higher in millet, coarse cereals, cotton and other crops. Net-net, till this point of time, there is nothing much to complain about kharif crop plantation this season. That apart, the government has stock of food grains, can take measures like export restrictions etc., as and when required to contain inflation.

Global Inflation

Globally, inflation had peaked last year. Commodity prices have eased since then, which helps our inflation as well. Crude oil price has been assumed at $85 per barrel by RBI for their inflation projection of 5.1%. Crude oil prices have mostly been within $85 since June 8, the date of the last policy review. One component of the inflation basket giving a negative surprise does upset things, but only to an extent. Broadly, GDP growth, inflation, current account deficit, currency level, etc., are moving more-or-less on expected lines. There may be some blips on the way, which is par for the course.

Markets react to blips in data points. However, that is not the basis of your investment decisions or shuffling your portfolio. It is about awareness of what is going on around you. Inflation over the next month or two is one of those.

Source: https://www.financialexpress.com/money/your-money-dont-get-affected-by-inflation-data-blips-in-data-points-should-not-impact-your-investment-decisions-3201498/