Food fuels WPI inflation to 3-year high, dashes rate cut hopes

Higher food, fuel, non-fuel commodities and power prices, and playing out of base effect in February had led to both wholesale price index (WPI) and consumer price index (CPI) or retail inflation soaring northwards to 6.55% and 3.65%, respectively.

The WPI inflation was highest in 39 months while the retail inflation was at a 4-month high.

The February CPI inflation, which has risen from 3.2% in January, has climbed up mainly due to higher food inflation that went up to 2% last month from a five-year low of 0.6% in January when it had moved into the positive zone after three months of deflation that was partly caused by demonetization.

Market research firm Asia Insights, in its report on Tuesday, expects CPI inflation to continue to rise throughout 2017 owing to higher minimum support prices (MSPs), a narrowing output gap and higher rural wages.

"Sequentially, prices of cereals, meat and fish, milk, fruit and sugar rose at their fastest pace. Vegetable price deflation has also started to wane. Meanwhile, underlying inflation moderated. core CPI inflation (CPI ex-food, fuel) moderated to 4.8% y-o-y (year-on-year) in February versus 5% in January, core CPI (ex-petrol, diesel) inflation eased to 4.4% from 4.6%, while our preferred trimmed mean measure eased to 4.3% from 4.4%. This suggests that the lagged impact of the negative output gap on (lower) core inflation is still evident," said the research report of the Singapore-based consultancy firm.

Ranen Banerjee, executive director of PwC India, said last month's overall inflation was primarily fuelled by a rise in fuel and power prices.

"What have contributed to its (overall inflation in February) increase is fuel and power prices. If you look at agricultural commodities, which carry a weight of 20%, it has contributed to about 15% of the increase. And if you look at fuel and power, which have 15% weight and are less than agricultural commodities, have contributed to about 48% of overall inflation," he said.

Banerjee also pointed to base-effect coming into play in February.

According to him, even in the fuel basket, it were oils like diesel, kerosene and other industrial fuel which have grown more than others; "They were -0.8% (a year back) and they have come to 29.8% (in February) so that's the kind of magnitude of increase. It's almost a 30 percentage point increase".

The PwC economist, however, said in the event of a good monsoon and softening of crude prices the uptrend in inflation could see a reversal.

"Food prices could go down if there is a good monsoon. You can also see that even though the OPEC (Organisation of the Petroleum Exporting Countries) has cut oil production, it (crude) is facing a lot of downward pressure owing to increase in US production. In the last one week, oil has fallen by $5 per barrel, and is hovering around $50 or sub-$50 per barrel," said Banerjee.

Soumya Kanti Ghosh, chief economic advisor, State Bank of India (SBI), pointed to rise in fuel inflation and lower base in the same month last year for a big leap in WPI inflation

"The WPI increased to a three-year high of 6.55% in February compared to 5.25% in January due to rise in fuel inflation (21%) and lower base in the previous year's index (February 2016 at -0.85%). The core WPI, which has been increasing since July 2016 was at a 28-month high of 2.67% in January, declined marginally to 2.42% in February 2017," he said in a statement.

Aditi Nayar, principal economist, Icra Ltd, said the uptick in the CPI numbers last month was not a cause for concern as it was more due to "unwinding of the base effect", accompanied by a "fairly broad-based" dip in core-CPI inflation "with even services such as health and education displaying a downtrend in inflation".

"The month-on-month rise in food prices was muted in both the CPI and the WPI, dampened by the continued correction in prices of pulses, on the back of healthy production estimates for FY2017," she said.

Nayar did see any "likelihood" of the Reserve Bank of India (RBI) slashing repo rate in April.

"The likelihood of a repo rate cut in April 2017 remains subdued, given its focus on bringing inflation to 4% in a durable manner. In fact, CPI inflation is expected to rise to above 4.5% in March 2017, as the base effect continues to unwind and prices of perishables track a seasonal uptrend," she said in an Icra note.

Asia Insights, whose outlook for overall inflation was 5% in 2017 compared to 4.9% in 2016, also expects "the RBI to stay on hold (on tinkering with the repo rate) throughout 2017" as it believes CPI inflation could continue to flare up during the current year.

"We expect food price inflation to rise as remonetization progresses (distress selling of perishables triggered by the cash shortage should reverse) and owing to higher minimum support prices (higher cereal price inflation). Additionally, we do not expect a sustained downtrend in core inflation because the output gap will likely gradually narrow (the demonetization effect on growth is waning) and because rural wages have also stabilised," said the report brought out by it.

PwC's Banerjee also did not see the RBI looking at any more bank rate cuts in the current year as inflation was "being pushed more from the supply side than the demand side.

"This is a more supply-side factor. So, I don't think RBI is going to act on this. They would like to wait and watch," he said.