India's rate of wholesale price inflation held at 7.2% y/y in December, the same as the previous month. This was in line with expectations. Inflation in fuel and manufactured goods both eased over the month, while food inflation remained elevated.
The price of primary articles rose 10.6% y/y. Food prices rose 11.2%, with cereals 19% higher and wheat up 23.2%. The price of non food primary article rose 13.2%.
Fuel and power prices rose 9.4% y/y. LPG was 4% higher, with petrol up 4% and high speed diesel 14.6% higher following the government's price increase in September.
The price of manufactured goods, which account for 65% of the WPI basket, rose 5% y/y, which was weaker than 5.4% in November. Manufactured food prices rose 9%, with chemicals 5.5% higher and basic metals up 3.4%
Wholesale price inflation held steady in December, in line with our forecast though against consensus expectations for a modest uptick. Food inflation remains stubbornly high and is likely to creep higher as the full effects of a sub-par monsoon season cut crop yields, pushing up prices. The government will be cognisant of this; next year is an election year and food inflation can topple governments in India. Fuel prices eased slightly, though they tend to bounce around a bit depending on what commodity markets are doing.
The most pleasing component is that for manufactured goods, which account for the bulk of the WPI and is probably the closest thing that India has to a core measure of inflation. This gauge has been trending steadily lower for several months now and could go lower in the coming months. The fall was broad-based, with most subcategories of manufactured goods showing lower inflation in December, suggesting that it is being driven by supply-demand dynamics. That is, the Indian economy has been growing below potential for several quarters and this is now driving inflation lower.
These signs all suggest that manufactured goods inflation will trend lower in the coming months, which will probably be enough to drag headline WPI slightly lower. We are likely to see WPI inflation trend below 7% in the second quarter of 2013.
Glenn Levine, Senior Economist, Moody’s Analytics