 "Price rise set to gain momentum in coming months")
It is difficult to tame inflation in India. At one time it could be too much rain driving prices up and at another, the lack of it. After falling for several months, the wholesale price index (WPI) print for July has come in at 5.8 per cent, way ahead of the consensus estimate of five per cent. The WPI index was at 4.86 per cent in June and 7.52 per cent in July 2012.
Though most other components also inched up, increases in fuel and vegetable prices have largely contributed to the headline print's upward move. Food inflation (primary and manufactured) has risen to 9.5 per cent year-on-year (y-o-y) from 8.6 per cent in June. The timely arrival of rains proved a challenge as it disrupted supplies, resulting in vegetable prices shooting up 46 per cent. Onions, another staple food item, is up 146 per cent year-on-year. After staying below 10 per cent for four months, the food price index has inched up again.
With the government increasing the prices of fuel on a regular basis, the fuel component increased 11.3 per cent in July from 7.1 per cent in June, driven largely by higher prices of diesel and petroleum. Manufactured products' inflation, has moved up to 2.8 per cent y-o-y from two per cent levels seen in June. Sonal Varma, economist at Nomura, believes the rupee's weakness is resulting in a sharp rise in input costs, which explains a large part of today's surprise. "While there are near-term upside risks to WPI inflation from higher food prices and a weak currency, we do not expect a sustained rise in WPI inflation due to very weak demand," she adds.
Not everybody is as optimistic as Varma. The headline print has not overshot due to last year's lower base. A supportive base has kept the WPI range-bound around five per cent in the past few months. In the coming months, inflation could be driven up by factors such as higher import duties, increased government spending and stronger rural consumption. Dhananjay Sinha, strategist at Emkay Global, believes rising cost momentum and a fading base year benefit will spike WPI inflation substantially. Going by the inflation trajectory over the last two months, inflation for the full-year could average between six and seven per cent, well ahead of the Reserve Bank of India's (RBI) 5.5 per cent target. It goes without saying that if the inflation trajectory continues to move up, rate cuts will be delayed even further. Corporate India does not expect the rate easing cycle to resume before FY15.
Though most other components also inched up, increases in fuel and vegetable prices have largely contributed to the headline print's upward move. Food inflation (primary and manufactured) has risen to 9.5 per cent year-on-year (y-o-y) from 8.6 per cent in June. The timely arrival of rains proved a challenge as it disrupted supplies, resulting in vegetable prices shooting up 46 per cent. Onions, another staple food item, is up 146 per cent year-on-year. After staying below 10 per cent for four months, the food price index has inched up again.
With the government increasing the prices of fuel on a regular basis, the fuel component increased 11.3 per cent in July from 7.1 per cent in June, driven largely by higher prices of diesel and petroleum. Manufactured products' inflation, has moved up to 2.8 per cent y-o-y from two per cent levels seen in June. Sonal Varma, economist at Nomura, believes the rupee's weakness is resulting in a sharp rise in input costs, which explains a large part of today's surprise. "While there are near-term upside risks to WPI inflation from higher food prices and a weak currency, we do not expect a sustained rise in WPI inflation due to very weak demand," she adds.
Not everybody is as optimistic as Varma. The headline print has not overshot due to last year's lower base. A supportive base has kept the WPI range-bound around five per cent in the past few months. In the coming months, inflation could be driven up by factors such as higher import duties, increased government spending and stronger rural consumption. Dhananjay Sinha, strategist at Emkay Global, believes rising cost momentum and a fading base year benefit will spike WPI inflation substantially. Going by the inflation trajectory over the last two months, inflation for the full-year could average between six and seven per cent, well ahead of the Reserve Bank of India's (RBI) 5.5 per cent target. It goes without saying that if the inflation trajectory continues to move up, rate cuts will be delayed even further. Corporate India does not expect the rate easing cycle to resume before FY15.