Core inflation pressures remain

India's Wholesale Price Index-based (WPI) inflation fell to a four-month low of 5.4 per cent in June from six per cent in May. While the fall in inflation came from lower food and fuel inflation, the manufacturing inflation in fact edged up slightly.

A decline in inflation in foodgrain, fruit and vegetables, egg, meat and fish drove food inflation down to 8.1 per cent in June from 9.5 per cent in May. Fuel inflation also fell by 1.5 percentage points to nine per cent, as petrol prices fell from the 28-month high seen last month. A part of the fall seen in both food and fuel inflation was also due to the strong base effect from the same month last year.

The non-food manufacturing inflation - the Reserve Bank of India (RBI)'s measure of core inflation - edged up to 3.9 per cent in June from 3.8 per cent in May. Core inflation captures demand-side pressures on prices and is expected to rise as the economy grows. Industrial production for May (4.6 per cent year-on-year growth) signals that the economy is witnessing green shoots of recovery. As the growth recovers, price pressures across several manufacturing categories such as beverages, textiles, chemicals and machinery and machine tools will rise further.

Rising metal prices also contributed to the higher non-food manufacturing inflation in June. Ferrous metals inflation rose to 2.4 per cent in June from 1.8 per cent in May, metal products inflation rose to 4.3 per cent offsetting the fall in non-ferrous metals inflation.

Therefore, in contrast to non-food manufacturing inflation, CRISIL Core inflation Indicator (CCII), an alternative measure of core inflation which removes metal prices from the WPI manufacturing index, remained unchanged at 3.8 per cent in June. CCII removes metal prices because they are mostly determined by changing global demand-supply dynamics and volatility in exchange rate rather than domestic conditions alone.

Unlike in RBI's measure of core inflation, the CCII also includes manufactured or processed food prices, as they reflect second-round impact of inflation in primary food articles, and therefore capture domestic demand-side pressures in the economy. Even as primary food inflation fell during the month (mainly due to the strong base effect) inflation in manufactured food articles rose to 2.3 per cent in June from 2.2 per cent in May.

Going ahead, while any pick-up in core inflation indicators will be gradual as the economic recovery still remains fragile, core inflation seems have bottomed out.

In addition, sub-normal monsoon is emerging as a key risk and could cap economic growth this year. Poor agriculture growth, could result in weak demand, limiting any pick-up in core inflation.