Wholesale price inflation scaled a 30-month high of 5.25% in January, thanks primarily to a favourable base effect and as elevated core and fuel inflation more than offset deflationary pressure in primary food articles induced by demonetisation.
Core inflation rose to a 28-month peak of 2.7% in January and at 18.1%, price pressure in fuel touched the highest in the current series, although food inflation hit -0.54% in January, the official data released on Tuesday showed. Retail inflation plunged even at a sharper pace to touch a five-year low of 3.17% in January.
Analysts said food inflation, which has remained subdued in recent months, is likely to be a key driver, along with fuel, of both wholesale price and retail inflation gauges in the coming months as seasonal impact turns unfavourable for food articles, especially vegetable and fruit. This will prevent any prospects of a rate cut anytime soon.
According to DK Joshi, chief economist at Crisil, even CPI inflation could see “upside pressures hereon as some benefits from a high-base effect will begin to wear out and as the imported component of inflation nudges up”. Also, as the economy is remonetised, some pent-up demand will have returned, he said.
The stickiness in core inflation despite continued decline in other parts of the index is a worry since wage-price negotiations based on a sticky core can potentially lift overall inflation, he added.
On the wholesale price front, the acceleration in January was driven by higher input costs (non-food primary articles, minerals, fuel, basic metals), which more than offset the tepid food inflation reading (barring sugar) caused by demonetisation, said Nomura’s Sonal Varma. The coking coal index (0.4% weighting in the WPI) rose by 84% month-on-month, after not changing for three years, she added. However, there was no sign of demand-pull inflation, as prices of manufactured products such as wood, leather, non-metallic mineral products, machinery & machine tools and transport equipment declined month-on-month in January, she added.
A breakdown of WPI components into input costs and output prices reveals input cost inflation surged to 6.8% year-on-year in January from 3.9% in December, while output prices moderated to 2.4% in January from 2.5% in the previous month. Thus, not only was the acceleration entirely supply-push, led by higher commodity prices, rather than demand-pull, but it also suggests rising pressure on profit margins.
With the monetary policy committee changing its stance from “accommodative” to “neutral” last week and analysts expecting inflationary pressure to return in the coming months, the current sharp decline in headline CPI and WPI inflation is unlikely to have much of a bearing on the repo rate cut anytime soon despite a 0.4% contraction in industrial output in December. However, most analysts view the CPI inflation will be lower than the RBI’s forecast level of 5% by March.
Giving an outlook for the coming months, Aditi Nayar, principal economist at Icra, said: “Average food prices have displayed a mixed trend in early-February, with a rise in prices of cereals, sugar and tomatoes and a decline in that of pulses, potatoes and onions. We continue to expect food inflation to rise in February and March, as the base effect turns unfavourable, and rising temperatures push up prices of perishables in a relatively broad-based manner.”