Editorial: The Phailin effect

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SummarySpike in both WPI and CPI is explained by this

If the sharp spike in CPI from 10.17% in October to 11.24% in November wasn’t enough to get analysts to ask for a repo rate hike, yesterday’s WPI has reinforced that call—WPI rose from 7% in October to 7.52% in November. Once you strip away the effect of fruits and vegetables, however, the impact is quite different—food articles inflation rose 14.1% between April and November FY14 as compared to 9.4% in the same period in FY13, and inflation growth has more than doubled in the case of vegetables. Strip this away, and while there is little doubt core WPI has risen from 2.19% in June to 2.64% in October and 2.66% in November, it is dramatically lower than the 2012 average of 5.4%—in the first 11 months of 2013, the average has been 2.9%, suggesting a much lower underlying inflation momentum today. In other words, given the secular fall in all economic indicators, whether on services or manufacturing growth, WPI can also be expected to fall sharply once fruit and vegetable prices come off—a Citi Research note estimates that, all things being equal, a 25% fall in vegetable prices from current levels would pull down WPI by around 100 bps and CPI by around 200 bps.

Indeed, as FE pointed out on Sunday, while the jump in food inflation is quite unexpected—WPI and WPI ex-fruits and vegetables are now diverging quite sharply, something not seen over the past 5-6 years—much of the spike is localised. South Asia research head of Standard Chartered Samiran Chakraborty points out that states affected by the cyclone Phailin tended to have much higher CPI inflation than those which were not. So, Orissa had a 3.8% inflation in November and Bihar 2.8% versus a much lower 0.5% in Gujarat and Maharashtra. In which case, what RBI needs to see is whether it is going to react to large trends—of a flat core inflation, even though much higher in the case of CPI than WPI—or whether it is going to react to seasonal/freak factors.

Apart from the fact that inflation in fruits and vegetables will start diminishing from now on, so will inflation in fuel products as both oil prices and the rupee stabilise—in the case of diesel, the 13% hike between January and now will also lower the impact of the monthly 50 paise hikes once the initial 12-month cycle gets over. As with any policy that is

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