Economy_Inflation Update: Food Eases, Core Surges

Analyst: Kruti Shah, CFA, +91-22-6184 4320; kruti.shah@karvy.com

WPI for Feb’14 slowed down sharply to 4.68% YoY from 5.05% in Jan’14 and 6.40% in Dec’13. On a broader level, there has been no change in WPI index as drop in Food and Fuel & Power Inflation was offset by surge in Core Inflation. So far this fiscal, build-up in wholesale prices have augmented by 5.17% YTD primarily due to increase in prices of high speed diesel by 13.34% YTD and industrial electricity prices by 28.36%. Although food inflation contributed significantly to headline figure, it slowed down to 5.60% YoY from a peak of 13.81% in Nov’13. Dec’13 WPI has been revised upwards by 22bps to 6.40% primarily due to revision in Core inflation which now stands at 3.25% in Dec’13 from the provisional estimate of 2.75%.

Core inflation edged up to 3.15% YoY in Feb’14 as compared to 3.04% in Jan’14. Relative rise in prices of Chemicals & Chemical products – which rose by 3.43% YoY from 3.02% in Jan’14 and basic metals that rose by 0.91% in Feb’14 from 0.36% in Jan’14 – contributed to the rise in core inflation. Depreciation in the currency in FY14 adversely impacted the prices of Metals and Chemicals products. PMI also highlighted a rise in metal, chemical, textiles and energy prices in Feb’14. Meanwhile, competitive pricing pressures are likely to add to the limitations of pricing power. Household expectations survey on WPI showed a marginal rise in Core Inflation for Q4FY14 & Q1FY15 and is likely to stabilize thereafter.

Average WPI for Apr-Feb’14 remains elevated at 5.94% YoY, compared to 7.54% in the year-ago period. Supply disruption caused significant volatility in vegetable prices which rose to nearly 97.72% YoY in Nov’13 and slumped back to 3.99% in Feb’13. Correction in prices was sharper at wholesale level than at retail level. In line with our expectations, Fuel Inflation declined to 8.75% YoY from 10.03% in Jan’14 mainly due to drop in Coking Coal, Kerosene and Petrol prices. Market driven Fuel inflation remained higher than administered fuel inflation at 9.14% in Feb’14, compared to 8.51% in Administered Fuel prices.

Our View:

Average WPI in FY14 is estimated in range of 5.80-6.00% from an average of 7.36% in FY13 which is likely to be largely contributed by decline in pace of core inflation. However, core inflation is likely to remain a concern with imported inflationary risks and rising cost of transportation and distribution. Prices of metals dropped sharply in Mar’14 which is likely to provide some respite to rising core inflation.

RBI is likely to pause in its Apr’14 policy, as CPI inflation further tapered down to comfortable range of 8.10% in Feb’14- slightly above RBI’s target of 8.00%. Slowing down of Core CPI Inflation further substantiates our belief of end in the tightening cycle from the central bank.