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What to think? April CPI & WPI inflation diverge

Food inflation is likely to creep up as the disinflationary impact from the supply-side normalization for fruit and vegetables has run its course, HSBC Global Research says

May 15, 2014 3:41 IST | India Infoline News Service
While CPI inflation firmed in April, WPI inflation eased. The divergence was partly driven by food inflation, which rose for CPI and slowed for WPI. However, core inflation held broadly steady in both cases. Looking ahead, inflation is likely to remain sticky as food-related disinflation has come to an end. Moreover, the El Nino and administered fuel price hikes post-elections pose upside risks. The RBI will, therefore, not have much to cheer about and will need to maintain a hawkish stance.
Facts
-CPI inflation, released on Monday, rose more than expected to 8.6% y-o-y in April (vs. 7.3% in March). The acceleration was mainly driven by food (9.8% y-o-y vs. 9.1% in March) and household requisites (7.3% y-o-y vs. 6.5% in March). Many other components decelerated, but core CPI (ex food and fuel) was unchanged at 7.8%.
- WPI inflation released today surprised on the downside (5.2% y-o-y in April vs. 5.7% in March and consensus of 5.7%). On a sequential seasonally adjusted (sa) basis, WPI inflation contracted 0.3% m-o-m (vs. 0.4% growth in March). The deceleration was mainly driven by food and energy (8.9% y-o-y vs. 11.2% in March). Meanwhile, core WPI (non-food manufactured goods) eased slightly to 3.4% y-o-y (vs. 3.5% in March) and, was unchanged in sequential terms (vs. +0.3% m-o-m sa in March)
Implications
Despite the easing of WPI inflation, the rise in CPI inflation and steady core inflation reading in both cases showcase the lingering inflation problems.
The food driven divergence between CPI and WPI could have resulted from differences in cost pressures at the different levels of the supply chain, but it is difficult to pinpoint more exactly, at this stage, what was behind this.
Looking ahead, however, food inflation is likely to creep up as the disinflationary impact from the supply-side normalization for fruit and vegetables has run its course. Moreover, the El Nino is expected to lead to below-normal precipitation, which could lift food inflation over the summer and into the fall.
Energy inflation slowed for both indices in April, but this reflects the temporary stop to monthly fuel price adjustments ahead of the elections. These are expected to resume post elections.
More generally, inflation is expected to be held up by the elevated inflation expectations, which are proving very sticky after years of high inflation. Moreover, capacity remains tight in the supply-constrained economy. The RBI will, therefore, not have much to cheer about and will need to maintain a hawkish stance.
Bottom line: CPI inflation picked up, but WPI inflation eased in April. The divergence was primarily driven by the food inflation. However, core inflation remained broadly steady in both cases. Looking ahead, El Nio and administered fuel price hikes are expected to add to RBI's concerns.


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