Economy
WPI inflation to rise again after base effect wears off

According to Nomura, headline WPI inflation in India would moderate further over the next four months before rising again as favourable base effects wear off

 

India's inflation based on wholesale price index (WPI) eased in August to a better-than-expected 3.7% from 5.2% in July on favourable base effects and lower global crude oil prices. While the headline WPI inflation is expected to moderate further over the next four months, it would rise thereafter closer to the underlying trend in first quarter of 2015 as favourable base effects wear off, says Nomura in a research report.

 

"From a broader perspective, the underlying trend in WPI inflation is around 5.0-5.5%, with volatility around this trend driven by supply-side shocks and base effects. Overall, we expect headline WPI inflation to average 5.0% y-o-y in FY15 from 5.9% in FY14," the report said.

 

 

India's WPI inflation fell sharply to 3.7% in August from 5.2% in July, lower than market expectations and the lowest reading since October 2009. This was largely on favourable base effects and a sharp fall in global crude oil prices.

 

The base effects, on an abnormal increase in vegetable prices in August 2013 were largely concentrated in the food basket, as food price inflation (primary plus manufactured) fell sharply to 4.6% in August from 7.0% in July despite an increase in prices across categories led by vegetables (6.7% month-on-month) and milk (3.1%). And the impact of lower global crude oil prices was evident in lower fuel price inflation, which eased to 4.5% y-o-y from 7.4% in July.

 

Meanwhile, core WPI (WPI manufactured ex-food) inflation eased only slightly to 3.5% in August from 3.6% in July, led by a moderation in inflation rates in textiles, rubber and plastic and basic metals sub-categories. Also, June WPI inflation was revised up to 5.7% from 5.4% earlier owing to an upward revision in the food and core components.

 

From a CPI inflation perspective, the sharp increase in milk prices at the wholesale level could spill over to the retail level and thus put some upside pressure on CPI inflation. Likewise, inflation in oilseed prices continued to climb at the wholesale level. Although price inflation in edible oils at the retail level remains contained for now, we reckon there could be some upside pressure in coming months, Nomura added.

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