Inflation Jun 2010- Update

WPI index increased from 258.1 in May ’10 to 259.8 in Jun’10. This implied inflation for Jun ’10 at 10.55% (YoY), lower than market expectations of 10.8% (as per several newswire polls). Again, we get a lower than expected inflation number like IIP numbers for May.

Inflation was lower as market participants expected a higher figure for the manufactured products sub-sector (explained below). For April ’10, inflation was revised upwards from 9.59% to 11.23%.  Once again inflation has been revised upwards significantly. In May-10 update, March 2010 numbers were revised upwards from 9.9% to 11.04%. 

WPI Jun-10 Inflation
  Index Rate of Inflation (YoY in %)
  May- 10 Jun-10 May -10 Jun-10
Primary Articles 299.9 302.1 16.61 16.28
Food Articles 294.6 295.2 16.5 14.6
Non-food articles 292.4 286.4 18.60 18.59
Fuel Products 368.2 374.4 13.04 14.32
Manufacturing Products 219.1 219.5 6.41 6.66
WPI Inflation (Headline) 258.1 259.8 10.16 10.55
Core Inflation 111.3 111.8 6.58 7.29
Source: Commerce ministry

Sector-wise Analysis

 Primary articles: : The index for primary articles increased from 299.9 in May ’10 to 302.1 in Jun-10. This implies primary articles inflation at 16.28% (y-o-y) in Jun’10.  Index has been higher but inflation is lower on account of base-effect. We usually analyse primary articles by looking at two sub- groups: Food Articles and Non-food articles. Actually there is a 3rd sub-group as well- Minerals. It is no included as it does not move for many months and then suddenly changes sharply. In June it has changed sharply. 

  • Food: The index for Food Articles increased from 294.6 in May’10 to 295.2. This implies food articles inflation for Jun’10 at 14.6% (y-o-y).  Again inflation is lower on account of base-effect. This has led to similar movement in overall primary articles index. The index increased due to higher prices of meat items like beef, buffalo meat, fish, poultry chicken etc. Prices of urad, condiments & spices, maize, tea, barley   and jowar also rose.  However, the prices of coffee and bajra declined.
  • Non-food: The non-food articles index also increased from 283.1 in May’ 10 to 286.4 in Jun’10. This implies non- food articles inflation for Jun’10 at 18.6%. The index for ‘Non-Food Articles’ increased due to higher prices of raw items like fodder, cotton, silk and rubber. Prices of oilseeds like castor seed and groundnut seed also increased. However, the prices of sunflower and niger seed declined.
  • Minerals: Minerals group index rose from 682.2 in May’10 to 722.7 in June -10. The index rose because of higher prices of chromite , magnesite , iron ore  and steatite.  However, the prices of manganese ore and feldspar declined.

Fuel group: The index for Fuel Group Articles increased from 368.2 in May’ 10 to 374.4 in Jun’10.  This implies fuel group inflation for Jun’10 at 14.32%. The fuel group index increased because of government decision to deregulated prices of petrol and diesel (more gradually) and increase prices of kerosene and LPG cylinders.  Apart from these items, prices of electricity also increased. However, prices of aviation turbine fuel, naphtha, furnace oil, bitumen and light diesel oil declined.

Manufactured Products: The index for manufactured products increased from 219.1 in May’10 to 219.5 in Jun’10. This implies manufactured products inflation for Jun’10 at 6.66%.

Prices of manufactured food products again declined in Jun’10. The food products index declined from 246.4 in May’10 to 244.2 in Jun’10.  The food products index has declined each month since reaching high of 260.8 in Jan’10. The index declined on account of lower prices of sooji, sugar, coffee powder, oil cakes, gingelly oil and maida.  However, the prices of groundnut oil, rice bran oil, cakes & sweet roles and gur and salt, bran (all kinds), biscuits and soyabean oil moved up. So, food products index has declined because certain products like sugar have declined by a higher percentage. Decline is not uniform across majority of products.

Moreover, it is not clear how price of manufactured food items is declining given price of food articles continues to rise. Some possible reasons:

  • Food articles index declined from Dec-09 to Mar-10 and again rose in May -10 and June -10. So, it could be that prices of food products rise again with a lag. Minimum Support Prices have again been risen this season which should have an impact on overall food chain
  • Companies may be getting weary of revising prices upwards regularly amidst stiff competition.
  • Another factor would be monsoon rains. So far, rainfall is 10% below long period average (Till Jul 8, 2010). If monsoon rains are better, then we might see a decline in prices of food articles and food products. 

Manufactured products index rose sharply because of a rise in prices of non-food manufactured items. Prices of textiles, paper, plastics, chemicals and metals also rose. Out of the 11 non-food manufactured sub-sectors, price rise was seen in nine sub-sectors. Only, non-metallic mineral products declined due to lower prices of cement.

Core Inflation (a primer here)
RBI has been focusing on this measure of inflation for its monetary policy actions. In core inflation, we exclude food items from Manufactured Products sub-sector.

Core inflation index has risen from 111.3 in May’10 to 111.8 in Jun-10. This implies core inflation for May’10 at 7.29% higher than 6.58% for May’10. Again core inflation has gone up. In manufactured products analysis, we saw that except for food products, price in all other sub-sectors has increased. This has resulted in core inflation moving further higher in Jun’10.

Summing up

Inflation may be lower than projections but still is very high. Moreover, we always see inflation revised upwards significantly. So, final revised numbers may actually be in line with market projections! Core inflation continues to rise as well with increase in price of non-food manufactured products indicating build up of demand pressures. Core inflation alone is higher than RBI’s headline inflation projection for March-2011 at 5.5%. Lot would depend on monsoon going forward. But again, monsoons also can solve the inflation problem temporarily. Inflation has become a structural problem with huge supply constraints and stagnant productivity in agriculture. Inflation is likely to remain a long-term issue unless these issues are addressed.

Therefore both inflation and IIP (recent analysis for May-10 here) will likely lead RBI to again increase rates in monetary policy to be held on 27 July 2010. However with global risks again rising, high vigilance needs to be maintained.

2 Responses to “Inflation Jun 2010- Update”

  1. Inlayed Shell Cabinet » Blog Archive » What Is The Commodity Research Bureau (Crb) Index And How You Can Use It To Beat Inflation Says:

    […] Inflation Jun 2010- Update « Mostly Economics […]

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    […] 2 2010 rate increases, then there have been two main data releases – WPI monthly inflation for Jun 2010 and IIP for May 2010. Both were lower than market expectations, yet fairly […]

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