Dec inflation eases to a 5-month low

Written by fe Bureau | New Delhi | Updated: Jan 16 2014, 10:53am hrs
After hitting a 14-month high in November, wholesale price inflation eased to a five-month low of 6.16% in December, helped by a sharp fall in vegetable inflation, government data showed on Wednesday. Although retail inflation, too, dropped to a three-month low of 9.87% in December, analysts feel the RBI would hold on to rates at its next review meeting on January 28 and wait for a sustained moderation in price pressure before considering an easing of the monetary policy.

Moreover, the government also revised up the October inflation figure to 7.24% from 7% announced earlier, raising risks that any talks of easing inflationary trend based on the provisional December data alone could be a bit premature, said analysts.

Core inflation (the price rise in non-food manufacturing products), however, inched up to 2.8% in December from 2.7% in the previous month. With vegetable prices unlikely to spurt irrationally in the next two months, thanks to easing supplies, the movement of core inflation will be more crucial to monetary policy-making, the analysts said. After hitting 5.8% in August 2012, core inflation eased each month to touch 2.1% in September 2013 before inching up again for a fourth straight month through December.

With the noise in inflation data (created by high and volatile prices of vegetables) likely to abate further, we do not expect the RBI to raise the repo rate in its (upcoming) monetary policy review, Crisil said.

Analysts said the RBI would be mindful of the impact on inflation of a near 22% rise in non-subsidised LPG cylinder prices in January and any move to progressively align diesel prices with the market rate (diesel prices may see a one-time hike of R2/litre), although a poll-bound ruling coalition may not risk hiking the diesel rates with regularity in the run-up to the general elections.

With a weak rupee and rising fuel prices, producers margins are already under stress, and the expectation of improving household consumption following good monsoon rains was also shattered when the latest IIP data were out. Coming on the back of industrial output witnessing a 2.1% contraction in November, the drop in inflation prompted industry chambers to renew calls for an immediate cut in interest rates.

The data showed even in the peak festival month of November, consumer goods segment witnessed a 8.7% contraction from a year before, with consumer durables output dropping by a whopping 21.5%.

Price rise in vegetables in the double digits since May has been the biggest driver of headline inflation rising sharply from July and peaking in November at 95.3% before easing to 57.33% last month. Vegetables contributed nearly 24% to overall wholesale price inflation between July and December 2013. Both fruit and vegetable segments witnessed an average inflation of 38.9% since July, compared with the average headline inflation of 6.8%. These two segments have also contributed the highest in pushing up CPI, which remained in the range of 9.6-11.2% since July.

Based on one observation we cannot make an assumption of a trend. If we look at the services PMI, IIP, CPI and WPI combined, then these four data suggest the RBI will maintain a status quo in the next policy, said Rupa Rege Nitsure, chief economist, Bank Of Baroda. I dont expect any rate cuts to begin in the near future because inflation continues to remain way above the RBIs comfort zone. There is also potential upside risks to inflation coming from global commodity prices especially oil prices, she added.