India: Base effect and food cause a temporary spike in inflation

  • March-2014 WPI and CPI inflation spiked 100 bps and 30 bps respectively, thereby reversing the recent declining trend
  • Core inflation exhibited differential trends, with core WPI at 12- month high of 3.5% while core CPI has remained below 8%
  • We expect adverse base to keep inflation elevated for next two months and then moderate to achieve RBI’s 8% target by January-2015. Hence, we expect the RBI to maintain status quo


Inflation reverses declining trend in March-2014

Inflation, at both retail and wholesale level, edged higher in March-2014. WPI inflation rose to 5.7% YoY versus prior reading of 4.7% while CPI clocked 8.3% YoY as against 8.0% in February. Core inflation, however, exhibited differential trends. While core WPI surged to 3.5% YoY from 3.2% in February, core CPI edged down to 7.82% YoY versus FYTD average of 8.0%.

The spike in inflation levels in March-2014 is attributable to an unfavourable base effect coupled with rise in food prices, on impact of adverse weather conditions. Hence, we believe that the spike is temporary and would reverse from June-2014 on the assumption of a normal monsoon.


WPI inflation spikes to 5.7% amid adverse base and spike in core

In March-2014, primary food inflation rose to 9.9% YoY versus prior of 8.1%, as adverse weather conditions caused a rise in fruits and vegetables inflation while protein inflation remained elevated. Further, fuel inflation rose to 6-month highs, given an adverse base effect.

The spike in core WPI indicates continued price hikes by manufacturersparticularly in metals and textiles sectors, on the back of rising input costs coupled with pressured profit margins. Our analysis of the PMI data shows a faster transmission of rise in input costs to output prices in the recent months.


CPI inflation edges up to 8.3%; drop in core provides relief

The rise in food inflation to 9.1% YoY versus prior of 8.6% amid impact of recent hailstorms was the prime driver of inflation. The slightly lower rise in food inflation in CPI vis-à-vis WPI possibly indicates some catching up expected. Meanwhile, fuel CPI inflation edged up slightly from record lows.

The drop in core CPI will be a source of relief for the RBI. The continued growth slowdown has triggered a fall in housing inflation to single digits and services inflation to 8-month low of 6.8% YoY. Almost 90% of drop in core CPI is contributed by fall in transport and communication services, with the downward pressure likely to continue as oil marketing companies are reducing petrol prices amid stable crude and domestic exchange rate.
Overall, we expect the declining trend in core CPI to continue.


RBI likely to keep rates unchanged on 3rd June

The RBI has shown a clear shift in focus from WPI to CPI, with the inflation projections provided only for the latter in the statement.

The 8.3% CPI inflation level is in line with our projections and on track to achieve the RBI’s 8% target by January-2015, on the assumption of a normal monsoon. While the projections signal extended pause, we believe that the RBI would remain cautious on possible re-emergence of food price pressures and stickiness in core inflation.