Inflation moves up despite a fall in IIP

Prashun Talukdar Posted online: Thursday, Apr 17, 2014 at 0000 hrs
New Delhi : Any hopes of a sustained recovery in industrial production due to high core infrastructure sector output growth in February, have been frustrated by persistent weakness in consumption demand, according to a report released by Crisil Research.

Retail inflation rose from 8.0% in Fbruary to 8.3% in March due to faster increase in prices of vegetables, fruits and milk & milk products.

The overall trend in core inflation, however, masks the underlying movements in the index. Housing and transportation & communication prices have been moving down in recent months (accounting for 40% of the overall weight in core) in line with the fall in crude oil prices and lower import costs due to stabilisation in the rupee. However, prices of the other items in the core inflation category such as clothing, bedding & footwear, medical care, education, recreation, personal care and household requisites (60% weight in core) remain sticky or continue to rise.

The Index of Industrial Production (IIP) fell 1.9% in February after staying almost flat in January.

CPI Core inflation (excluding food and fuel & light) inched up to 7.8% y-o-y in March from 7.7% in February (revised down from the provisional estimate). The overall trend in core inflation, however, masks the underlying movements in the index. Housing and transportation & communication prices have been moving down in recent months (accounting for 40% of the overall weight in core) in line with the fall in crude oil prices and lower import costs due to stabilisation in the rupee.

A continued weakness in domestic demand pressures should however, limit the upside pressure on retail inflation going forward. In the months to come, high inflation in food articles such as fruits, milk & milk products will keep retail inflation sticky around the current level.

A revival in infrastructure investments, if sustained, will eventually help in turning around the slump in consumption demand – weakness in consumer goods’ output closely tracks the slowdown in manufacturing.

The research group expects inflation to hover between 8.0-8.5% in the coming months, and hence, RBI to keep rates on hold - till temporary shocks and disturbances clear out and the underlying inflation momentum becomes evident.