Contrasting the lower-than-expected CPI in May14, WPI for the same month rose more than expected. Core WPI crossed the 4% mark for the first time since Feb13. Though food and fuel are still drivers of WPI, manufactured-product inflation is also inching up. The data do not change our outlook concerning monetary policy. We still expect status quo in the policy-rate till Sep14, and in the absence of a major jump in food prices, a 25-bp rate cut in Oct14 appears likely.
(Image Caption: Labourers work in a paddy field at Gunowal village on the outskirts of Amritsar, by Reuters)
Performance: After a surprising softening of the WPI in Apr14 and of the CPI in May14, the WPI inflation rose to 6% in May14, well ahead of expectations. The hardening WPI inflation in May14 has been across all segments. Primary-product inflation rose to 8.6% in May14 (vs 7.1% in Apr14); fuel & power to 10.5% (vs 8.9%) and manufactured products to 3.5% (vs 3.2%). In May14 core (non-food, non-fuel) rose to 4.1%, non-core inflation jumped to 8.1%. Inflation for Mar14 has been revised up word to 6% from 5.7%.
(Image Caption: A worker cuts a pumpkin to check its quality at a wholesale vegetable market in Kolkata, by Reuters)
Assessment: Both WPI and CPI inflation in recent months have been exhibiting considerable volatility and the month-over-month (m-o-m) trends of these two indices are often in opposite directions. It appears that changes in wholesale and retail margins could be contributing factors to such trends. After holding below 4% since Mar13, core WPI inflation crossed this level, indicating restricted pass-through of elevated non-core into core inflation. Yet, primary-item prices, especially animal-protein products such as fish and milk, on one hand, and administered diesel price hikes, on the other, are pushing up overall inflation.
(Image Caption: A man sells fish at a wholesale fish market in Kolkata, by Reuters)
Outlook: The difference in the WPI and CPI trends for the same month have sprung a surprise on us. Interestingly, while overall WPI inflation is 230bps lower than CPI inflation in May14, for most non-vegetarian items and spices, WPI inflation is higher than CPI. Except for the El Nino risk, we expect primary food inflation to revert to a downward trajectory. Fuel and power inflation is also likely to soften further in coming months. Electricity inflation, which fell to below 10% in Apr14, but bounced back in May13, is also likely to soften due to the announced cut in electricity prices by several states. The spillover of the high non-core into core inflation is playing out. Given the base, WPI inflation could hover largely around 5-6% in the next 3-4 months.
(Image Caption: A labourer rests on a heap of potatoes at a vegetable and fruit wholesale market in Chandigarh, by Reuters)
Recommendations: From the perspective of monetary policy, CPI has replaced WPI as the key inflation indicator. Consequently, the fall in CPI inflation in May14 is more significant than the rise in WPI inflation. We expect the RBI to hew to its wait-and-watch mode till Sep14. If the expected monsoon deficiency does not lead to a spike in food inflation, the RBI is likely to cut the policy rate by 25bps in Oct14.
(Image Caption: Two shopkeepers waiting for customers, by Reuters)