1. Data cafe: Troubling trend

Data cafe: Troubling trend

Input costs rising faster than output prices

By: | Published: July 16, 2015 12:24 AM

Even as deflation in wholesale price index (WPI) based inflation continued for the eighth consecutive month in June, at -2.4%, splitting the components of WPI, as done by Nomura economists Sonal Varma and Aman Mohunta, shows that both inputs costs and output prices are rising. Till March, input prices fell drastically, which meant, lower costs for manufacturing businesses and an expansion of profits. But now input costs are rising at a faster pace than output prices. This would mean that companies are no longer able to pass on the increase in input costs to consumers as consumption demand for various goods and services is not showing any signs of revival.

The slowdown in rural wage growth, lower rise in minimum support prices and below normal rainfall last year have stymied rural consumption. Particularly worrying is the slowdown in rural wage growth, which signals a weakening of rural demand. Growth in rural wages, which had averaged 18% till last year, has fallen to less than 5% in March this year. Even urban consumption demand is sputtering. National accounts data show private final consumption expenditure has dropped to 55.5% of GDP in Q4FY15 from 60% in Q2FY13.

Muted consumption and delay in revival of the investment cycle will weigh on India Inc’s results in the quarter ended June this year. Some of the initial results does not look very encouraging. In fact, Bank of America-Merrill Lynch, in its results preview, has underlined that profit growth of Sensex companies would be just 0.3% y-o-y on a consolidated basis.

While prices of key commodities, like oil and steel, are trending down, both WPI and CPI data suggest that the period of deflation is behind us and incremental price pressures because of domestic supply side constraints have started to build up again. Commodity prices are a key driver of WPI inflation, and even if they remain stable for some time, year-on-year WPI inflation will start rising because of the base effects. Moreover, led by a spike in retail food prices, the consumer price inflation (CPI) for June hit a four-month high of 5.4%, surging from the 5.01% the previous month. Core CPI inflation also rose to an 8-month high of 5.3% y-o-y in June from 5.1% in May, due to the service tax hike and higher fuel costs. These factors will certainly play out on the August 4 monetary policy of Reserve Bank of India.

  1. No Comments.

Go to Top