Oct WPI inflation races to 8-month high of 7%

Written by fe Bureau | New Delhi | Updated: Nov 15 2013, 07:32am hrs
Indias wholesale price index-based inflation raced to 8-month high of 7% in October mainly due to spurt in prices of minerals, electricity and some manufactured products, according to official data released on Thursday. This, coupled with a seven-month-high consumer price inflation of 10.09% for the same month reported earlier, has muddled analyst outlook on the monetary policy trajectory. While some forecast another interest rate hike in the December review, even though the recovery in investment cycle and economic growth remains feeble, others don't see any further tightening in the upcoming review.

The headline inflation in October, though higher than 6.46% in September, is still lower than 7.32% recorded in October 2012. But that is no solace as a stubbornly high food inflation especially that of onions is burning a hole in the household budget and increasing the anxiety of the UPA government ahead of state elections and Lok Sabha polls.

The news of a spurt in WPI inflation follows RBI Governor Raghuram Rajan's statement on Wednesday, that falling core consumer inflation was comforting despite "worryingly high" food prices. RBI had raised interest rates by a half-percentage point in two decisions since September.

Despite efforts to increase supplies, food inflation stayed high at 18.19% year-on-year as supply bottlenecks kept onion prices 278% higher than last year while prices of protein-based items like meat, eggs and fish rose 17.47%.

For policy-makers, what is worrisome is the spurt in core inflation, measured in terms of non-food manufactured product prices, to 6-month high of 2.58% in October compared with 2% in September.

"The inflation challenge is clearly far from over, with WPI rising even as growth remains lacklustre and food inflation is easing. Moreover, the upward revision to the August inflation print is a cause for concern," said Leif Essence, chief economist for India & ASEAN at HSBC. "This underscores the need for stepped up structural reform implementation and a hawkish central bank to scare away the inflation ghost."

Blaming the recent spike in inflation to food prices, analysts urged for structural reforms to remove supply constraints. "The rise in inflation in the recent months has been largely driven by inflation in primary articles and fuel. Primary articles alone have contributed around 44% to WPI inflation in the fiscal so far, despite having a weight of only 20%. Headline inflation has averaged 5.8% in this fiscal so far. Excluding primary however, inflation stands at 4.4%," Crisil said in a note.

CRISIL core inflation indicator rose to 3.1% in October from 2.7% a month earlier..

Mineral prices rose sharply 7% in October after it fell marginally in September. With steep hikes in electricity prices for all segments, the fuel and power group index rose by 10.33%. This was despite a cut in petrol prices during the month.

Although industrial slowdown has taken away pricing power from manufacturers, data showed manufactured product prices rising by 2.5% in October compared with 2.03 % in the previous month as items such as textiles, machinery and transport equipment became costlier.

With an overall upward pressure on prices, analysts expect at least another rate hike. With inflation rising, and the RBI now expecting WPI inflation to be higher than its earlier forecast of 5.5% in 2013-14, a 25 bps hike in the repo rate is likely during the remaining months of the fiscal," said Crisil.

We would urge RBI to review the policy rates in light of the fact that current inflation is primarily due to supply side bottlenecks, which cannot be checked by monetary tightening measures. Rather, any further tightening would worsen the industrial production scenario," said Naina Lal Kidwai, president of FICCI.