The worry for RBI in August inflation data: Jump in sugar and chip prices

India's headline inflation increased to an eight-month high of 4.82% in August, with wholesale inflation at 9.92% and producers' output price inflation at 9.81%. The Reserve Bank of India, whose inflation target is based on retail inflation measured by the Consumer Price Index (CPI), will likely increase the policy repo rate by 25 basis points to 5.5% on October 7, marking the first hike in three-and-a-half years.

Economists predict that CPI data for September will show retail inflation surpassing 5%, potentially reaching as high as 5.7%. This places the Monetary Policy Committee in an unexpected position, as it had previously stated there were "little signs of generalisation of price pressures." Economists argue that the current inflation rise is not a mere supply shock and will eventually pass to consumer prices, given strong demand conditions in India.

Sugar prices rose 19% in August from July, with year-on-year inflation at 24%. The price index for sugar, confectionery, and desserts category rose 7.6% month-on-month in August and contributed around 15 basis points to the headline inflation rate. Another factor contributing to inflation is the soaring price of Dynamic Random Access Memory (DRAM) chips, which have increased more than 400% from early 2024 to the end of 2026.

This "chipflation" will soon reflect in India's headline retail inflation rate. The inflation rates for 'information and communication equipment' and a broader 'information and communication' category have also risen significantly, further amplifying the pressure on policymakers.