The underlying WPI inflation trend is around 5.5%, with a mix of factors creating volatility around this trend
WPI (wholesale price index) inflation moderated to 4.7% year-on-year in February 2014 from 5.0% in January 2014. The moderation was due to lower input cost (primary + fuel) inflation, while output price inflation (core) rose slightly. On a seasonally adjusted basis, Nomura estimates that WPI inflation rose 0.3% month-on-month in February 2014, which is lower than the six-month average of 0.4%.
Both food and fuel price inflation moderated in February 2014, lowering cost pressures (Figure 1). Food price inflation (primary + manufactured) eased to 5.6% year-on-year from 6.2%, due to lower vegetables, protein-rich food (chicken, egg), tea, edible oil and sugar prices, while a decline in coking coal, electricity (agriculture), turbine fuel and LPG (liquified petroleum gas) prices moderated fuel price inflation. However, output price inflation – as measured by core WPI (manufactured ex-food) – rose marginally to 3.1% from 3%, partly on base effects and higher wood, paper and leather product prices.
Nomura expects both headline and core WPI inflation to accelerate over the next six months – headline WPI inflation above 6% and core WPI around 4%. First, base effects are adverse (Figure 3). Second, Nomura sees risks of higher momentum in food inflation from the unseasonable winter rains, hailstorms across the country and higher probability of El Nino (associated with lower rains) in 2014. Additionally, the rise in soft commodity prices globally over the last two months (led by coffee, sugar, corn) will likely increase input cost pressures in coming months.
In Nomura’s view, the underlying WPI inflation trend is around 5.5%, with a mix of factors (supply shocks, base effects, commodity price changes) creating volatility around this trend.
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