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Inflation Alert
Inflation Alert
WPI inflation for Dec ’11 softens to 7.47% from 9.11% in Nov’11
The WPI inflation for the month of Dec’11 moderated to 7.47% as compared to 9.11% in Nov’11 (9.45% in Dec 2010). It was a little higher than consensus forecast of 7.41%. Inflation came down below 8% after almost two years. Headline inflation was driven down by high base and sharp decline in Food prices. The inflation in Dec was primarily driven by manufactured products. Build up in inflation in the financial year so far was 4.95% compared to 7.12% in the corresponding period of the previous year. For the month of October, the final WPI was revised up to 9.87% as against 9.73% announced previously- up 15 bps.

Primary articles declined by 1.6% m/m
  • The Food inflation (with higher weightage within Primary) declined by 3% over the month on seasonal decline in vegetable prices.
    • The vegetable prices declined by a large 25% over the month. The prices of vegetables usually always decline in Dec. But the unseasonal rains in 2010 had resulted in sharp increase in vegetable prices in Dec’10. This high base helped bring annual Food inflation to 0.74%.
    • The important point to note here is that prices of protein based food articles like milk, egg, meat and fish have been continuously moving up highlighting structural issues (supply bottleneck) within food inflation. So, once the favourable base effect wears off and seasonal decline in prices stop, food inflation can move up again.
  • The non-food Primary articles moved up in Dec after two consecutive months of decline. This will get reflected in manufactured prices after a lag.
  • The minerals within primary also increased by 2.6% over the month due to higher prices of iron ore, crude petroleum etc. Depreciation of rupee is partly responsible for this.

Fuel products rose by 0.6% m/m
  • Non-administered prices of fuel products rose in Dec as Crude oil prices moved up. Petrol prices declined as oil companies had slashed prices at the start of the month. Weak rupee and problems in Iran will keep the pressure on Fuel products but administered fuel products like Petrol, Diesel, LPG etc might not move up before upcoming state election.

The manufactured products rose by 0.6% m/m
  • The pace of rise in monthly Manufactured product inflation increased in Dec again after going up in Nov. It went up by 0.6% over the month compared to an average of 0.29% seen in previous six months.
  • Dec inflation was majorly driven by Manufactured products. The contribution to annual rise in inflation from Manufactured products was around 58% (50% in Nov'11).
  • Price rise remained broad-based in Manufactured products. Within twelve product groups, only two items exhibited a decline over the month. Manufactured food products also increased.
  • Core inflation softened on annual basis as base was high in Dec. But on monthly basis, it moved up again significantly just like previous month. The acceleration of core inflation cannot be fully contributed to manufacturer’s pricing power. The rupee depreciation has resulted in increase in metal prices and other imported goods. Gold prices moved up also.

Bottomline
  • Overall inflation index in Dec remained at the same level as previous month and so month over month sequential rise was zero. The decline in Primary (Food) inflation was negated by rise in manufactured product and non-administered fuel products.
  • The accelerated pace of increase in manufactured product price will keep RBI cautious. Despite significant downside risks to growth emerging from domestic as well global developments, RBI will keep rates on hold. RBI might go for CRR cut in its upcoming policy meet on Dec 24 to ease liquidity. It is already conducting OMO on weekly basis.
WPI in Charts
Dec WPI inflation at 7.47% yoy vs 9.1% in Nov, a little higher than consensus expectation
Inflation at 7.47% in Dec The Non-Food and Food components within Primary Articles moved down significantly


Non-Food Manuf (core) moderated on annual basis on high base but accelerated sequentially
Fuel Index moderated a little on annual basis Non-Food Manufactured products accelerate on monthly basis


Base turns favourable in Dec
Trend in WPI (% YoY): favourable base and decline in food prices helped bring down inflation in Dec Final Oct WPI was revised up by 14 bps to 9.87%


The details for December’2011:

PRIMARY ARTICLES (Weight 20.12%)

The index for this group declined by1.6% m/m. The groups and items for which the index showed variations during the month are as follows:-

  • The index for 'Food Articles' group declined by 3.1% m/m due to lower prices of fruits & vegetables (13% m/m), condiments & spices (6% m/m), urad (5% m/m), poultry chicken (3% m/m), tea (2% m/m) and jowar, rice, arhar, ragi and barley (1% m/m each).
  • The index for 'Non-Food Articles' group rose by 1.3% m/m due to higher prices of gaur seed (20% m/m), flowers (14% m/m), linseed (8% m/m), soyabean (6% m/m), rape & mustard seed (5% m/m), raw silk (4% m/m), sunflower and raw rubber (3% m/m each).
  • The index for 'Minerals' group rose by 2.6% m/m due to higher prices of sillimanite (50% m/m), barytes (6% m/m), iron ore and bauxite (4% m/m each), dolomite and crude petroleum (3% m/m each) and magnesite (1% m/m)

FUEL & FUEL & POWER (Weight 14.91%)

The index for this group rose by 0.6% m/m due to higher prices of naphtha (5% m/m), aviation turbine fuel, light diesel oil and bitumen (4% m/m each) and furnace oil (3% m/m). However, the prices of petrol (3% m/m) declined.

MANUFACTURED PRODUCTS (Weight 64.97%)

The index for this group rose by 0.6% m/m..groups and items for which the index showed variations during the month are as follows:-

  • The index for 'Food Products' group rose by 0.7% m/m due to higher prices of processed prawn (9% m/m), canned fish (6% m/m), salt (5% m/m), gingelly oil (3% m/m), sugar, mustard & rapeseed oil, groundnut oil and khandsari (2% m/meach) and palm oil, vanaspati, soyabean oil and powder milk (1% m/m each).
  • The index for ‘Beverages, Tobacco & Tobacco Products’ group rose by 0.2% m/m.
  • The index for ‘Textiles’group declined by 0.3% m/m due to lower prices of jute sacking bag, cotton yarn, gunny and hessian cloth and man-made fibre (1% m/m each).
  • The index for ‘Wood &Wood Products’ due to higher prices of plywood & fibre board (2% m/m).
  • The index for ‘Paper &Paper Products’group declined by 0.3% m/m.
  • The index for ‘Leather & Leather Products’ group rose by 1.2% m/m percent due to higher prices of leather garments & jackets (3% m/m) and leather footwear and leathers (1% m/m each).
  • The index for ‘Chemicals & Chemical Products’ group rose by 1.0% m/m due to higher prices of di ammonium phosphate (5% m/m), paints (4% m/m), rubber chemicals (3% m/m) etc.
  • The index for ‘Non-Metallic Mineral Products’ group rose by 2.0% m/m due to higher prices of grey cement (4% m/m) and bricks & tiles (1% m/m).
  • The index for 'Basic Metals, Alloys & Metal Products'group rose by 0.9% m/m to higher prices of gold & gold ornaments (4% m/m), sponge iron and pencil ingots (3% m/m each), furniture and slab (2% m/m each) and steel rods, silver, utensils (other than aluminium), iron castings, pipes/tubes/rods/strips, steel castings, brass, aluminium and wire rods (1% m/m each).
  • The index for ‘Transport, Equipment & Parts’ group rose by 0.1% m/m due to higher prices of trolleys/tanker, gear boxes & parts and wheels & parts (1% m/m each).

Wholesale Price Index and Rates of Inflation (Base Year: 2004-05=100)



Trend of Rate of Inflation for some important items during last six months


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