'Food prices play havoc with CPI; IIP more a reflection of inventory drawdown'

Updated: Aug 15 2014, 00:10am hrs
Predicting vegetable prices is becoming a policy maker nightmare!

Thankfully, WPI inflation came in at 5.19% (SBI:5.17%). For the month of Jul14, retail vegetable prices increased at a staggering 17% on a MoM basis, even as mandi prices jumped by 30%.

The increase in wholesale vegetable prices were at 23%.

The increase in headline CPI prices was entirely driven by the jump in vegetable prices, even as headline WPI continued to stay at comfortable levels. Read Full Report

Remarkably, CPI excluding vegetables, Core CPI (combined), Core CPI-rural and Core CPI-urban have all converged at 7.4% in Jul14, indicating the disruptive influence of vegetable prices on the retail inflation (with a weightage at 5.44% against 1.74% in WPI).

Going forward, CPI may remain elevated in Aug14, though will decline from the current levels. Beyond Aug14, retail inflation will be significantly benign.

As of now, we are bang on 8% Jan15 CPI target, though there is a lurking possibility of food prices playing the spoilsport. Meanwhile, IIP numbers at 3.4% surprised on the downside.

Our prognosis is that, most of the consumer durables companies have witnessed a good volume growth in first quarter and to that extent, this number is likely to be revised upwards.

Additionally, there was massive inventory de-accumulation in the June quarter, that may have led to a decline in production numbers.

Overall, with consumer sentiments positive and discretionary spending on the rise, we are certain of a manufacturing recovery in FY15. Also, the inventory de-accummulation may will act as a positive drag on Q1 GDP numbers, that is currently trending at 5.5%-5.7%.

By Dr Soumya Kanti Ghosh, Chief Economic Adviser, Economic Research Department, State Bank of India