Knowledge Quotient

Inflation Update
Wholesale Price Index Inflation

India's WPI inflation for Jan accelerated to 8.56% yoy vs 7.31% a month earlier. (Consensus: 8.3%, last year same period: 4.95%). WPI Inflation is already a tad higher than RBI’s target of 8.5% by March end. Interestingly WPI inflation for Nov was revised up to 5.55% vs 4.78% reported earlier
On month over month basis WPI inflation went up by 0.8%. All components of inflation moved up. Inflation in the financial year so far (Apr to Jan) was 8.9% compared to a build-up of 1.51% in the corresponding period of the previous year.

What impacted inflation:
Primary Index

The index for Primary group rose by 0.2% m/m. The index for 'Food Articles' group declined by 0.7% m/m due to seasonal impact of lower prices of fruits & vegetables.
The index for 'Non-Food Articles' group rose by 2.7% m/m due to higher prices of soyabean, various oil seeds, raw rubber, raw cotton, raw silk, sugarcane etc.
The index for 'Minerals' group also rose by 0.6% m/m.

Fuel Index

The index for the Fuel group rose by 1.8% m/m due to higher prices of naphtha (21%), furnace oil (6%), bitumen, light diesel oil (3%). The coking coal and non-coking coal also went up significantly as prices got revised after a long gap.

Manufactured Products

The index for the manufactured products group rose by 0.7% m/m due to rise in 'Food Products' group by 1.6% m/m, Textile by 2.4% m/m, 'Rubber & Plastic Products' by 0.5% m/m, 'Chemicals & Chemical Products' by 0.5% m/m and 'Basic Metals Alloys & Metal Products' by 0.6% m/m.
Price rise in products like chemicals, metals, machineries, rubbers are clearly showing that inflation is slowly spilling into manufactured products from primary products.

What to look out for:
Food price inflation in India has more fundamental issues than drought

India food price inflation that touched 20% in Dec’09 has more to it than just drought.
Food prices had started rising much before the drought hit in 2009. Also the rise in food prices has been much steeper during 2005-09 compared to previous years. Similar trend is not observed in international food prices. The reasons:
- Much faster rise in Govt’s MSP prices of crops in last few years has resulted in higher food prices.
- Domestic demand is outstripping supply as crop yield growth slowed since 2000s.
- This year on %yoy term, food price inflation will drift lower due to high base last year and may give an illusion of food inflation being a just one-off thing.
- Food price inflation is likely to remain an issue in coming years exerting upward pressure on headline inflation. This could complicate monetary policy.
Prices of Manufactured products moving up
- The index for manufactured products moved up by significant 0.7% m/m in Jan showing that inflation from raw materials inputs (due to supply constraint) is slowly sipping into final products. Higher prices of Food products, Chemicals, Textiles and Basic metals have pushed up Manufactured products index as these have higher weightage. Thankfully, Machinery and Transport equipments that also have higher weightage in WPI, remained benign.
- Even if the manufactured products move up only modestly, the WPI inflation by March end will be significantly higher than RBI’s target.

Trend in Monthly WPI Inflation (% yoy)

The Year over Year change

	January 2010	December 2009	November 2009	October 2009	September 2009
All Commodities	8.56%	7.31%	5.55%	1.46%	0.46%
Primary Articles	14.52%	14.88%	13.95%	8.67%	8.41%
Food Articles	17.43%	19.17%	18.66%	12.99%	14.20%
Non-food Articles	10.57%	7.73%	4.84%	-0.08%	-3.56%
Minerals	-2.86%	-4.44%	-1.50%	-3.51%	-3.63%
Fuel, Power, Light	6.90%	4.29%	-0.75%	-6.66%	-8.18%
Coal Mining	2.70%	0.00%	-1.02%	-1.02%	-1.02%
Mineral Oils	10.33%	6.28%	-2.03%	-11.41%	-13.68%
Electricity	1.95%	1.95%	1.95%	1.95%	1.95%
Manufactured Products	6.55%	5.17%	4.33%	1.60%	0.53%
Food Products	22.57%	26.40%	25.74%	17.33%	13.05%
Beverage & Tobacco	4.26%	5.29%	4.47%	4.75%	4.75%
Textiles	8.96%	5.65%	4.45%	3.21%	1.34%
Wood	0.00%	0.25%	0.25%	0.25%	0.25%
Paper	-0.58%	-1.55%	-0.92%	-0.58%	0.10%
Leather	-2.18%	-1.25%	-1.25%	-1.25%	-1.25%
Rubber & Plastic	1.37%	1.08%	0.78%	0.12%	0.24%
Chemicals	8.01%	4.61%	4.52%	2.45%	2.40%
Non-Metallic Min. Prdt	-1.72%	1.80%	2.98%	3.03%	3.58%
Basic Metals, Alloys	-2.59%	-7.26%	-8.95%	-12.66%	-13.82%
Machinery & Tools	0.93%	-0.23%	-2.09%	-1.64%	-1.36%
Transport Equip./Parts	0.17%	0.17%	-0.85%	-0.85%	-0.51%

Month over Month change

	January 2010	December 2009	November 2009	October 2009	September 2009
All Commodities	0.81%	-0.28%	1.94%	-0.04%	0.75%
Primary Articles	0.21%	-0.63%	4.61%	-0.04%	1.56%
Food Articles	-0.69%	-1.20%	5.23%	0.00%	2.21%
Non-food Articles	2.73%	0.97%	3.82%	-0.25%	0.00%
Minerals	0.60%	-0.59%	0.63%	0.15%	0.00%
Fuel, Power, Light	1.83%	-0.06%	0.23%	0.00%	0.50%
Coal Mining	2.70%	0.00%	0.00%	0.00%	0.00%
Mineral Oils	2.68%	-0.14%	0.46%	-0.02%	0.82%
Electricity	0.00%	0.00%	0.00%	0.00%	0.00%
Manufactured Products	0.71%	-0.14%	1.34%	-0.05%	0.48%
Food Products	1.62%	-0.08%	4.88%	-0.33%	1.72%
Beverage & Tobacco	0.10%	0.00%	0.00%	0.00%	0.62%
Textiles	2.41%	1.15%	2.07%	0.56%	0.42%
Wood	0.00%	0.00%	0.00%	0.00%	0.00%
Paper	0.15%	-0.05%	-0.20%	0.20%	0.00%
Leather	-0.24%	0.00%	0.00%	0.00%	0.00%
Rubber & Plastic	0.53%	0.06%	0.00%	-0.24%	0.24%
Chemicals	0.52%	-0.78%	0.43%	-0.04%	0.26%
Non-Metallic Min. Prdt	-3.72%	-2.00%	0.00%	-0.49%	-0.44%
Basic Metals, Alloys	0.58%	-0.04%	0.12%	0.16%	-0.35%
Machinery & Tools	0.17%	0.12%	-0.17%	-0.23%	0.64%
Transport Equip./Parts	0.00%	0.00%	0.00%	0.00%	0.00%

Source: Bloomberg

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