WPI Inflation Update - August 2012 - Angel Broking

Inflation for the month of August inches up to 7.6%

- Wholesale Price Index (WPI) inflation for the month of August 2012 expectedly inched up to 7.55% as compared to 6.87% in July 2012, remaining sticky despite a high base of 9.78% in the corresponding period in 2011.

- The headline figure came in slightly higher than 7.1% estimated by Bloomberg's survey of economists.

- On a month-on-month (m-o-m) basis, headline WPI inflation grew steeply at 1.1% in August as compared to 0.1% during July 2012 over the previous month.

- The rise in headline inflation is driven by an increase in fuel and power prices and inflation in manufactured products.

- Inflation for the month of June 2012 has been revised upwards to 7.58% as compared to provisional estimate of 7.25%.

Trends in Inflation for the month of August 2012:

Inflation in Primary Articles has marginally declined to 10.08% during the month as compared to 10.39% in July 2012 due to moderation in food inflation. Inflation in food articles at 9.14%, marked a decline below the 10%-level after five months. While inflation in Food Grains continued to remain high at 15.09%, prices of fruits and vegetables decelerated to 5.38% in August as compared to 10.51% in July 2012. Inflation in Non-Food Articles and Minerals marked an increase to 13.75% and 9.74% respectively.

Fuel and Power inflation surged to 8.32% in August 2012 after easing considerably to 5.98% in July 2012 reflecting the revision of electricity tariff. The rise in electricity prices increased to 17.69% vis-à-vis a rise of 4% in July 2012 and a contraction of 1.32% in the corresponding period in 2011.

Inflation in Manufactured Products, having the highest weightage in the WPI, inched up for the third straight month to 6.14% as compared to 5.58% in July 2012. Amongst this category, Manufactured Food Products witnessed a rise in prices to 9.01% during the month led by an increase in sugar and edible oil prices. Rise in inflation of manufactured products has fuelled concern over core inflation in the economy since it has edged beyond the Reserve Bank of India (RBI)'s comfort level of 5%.

Policy Outlook: The government finally bit the bullet on hiking subsidized fuel prices. On September 13, 2012 the Cabinet Committee of Economic Affairs (CCEA) announced a Rs.5/litre hike in diesel prices and cap on the number of subsidized LPG cylinders to 6 per household. Although the hike in diesel and LPG prices is positive on the policy reform front since it will aid the government to narrow the fiscal deficit by reducing its subsidy burden to some extent; the move is likely to have an adverse impact on inflation. The rise in diesel and LPG prices is likely to be reflected in WPI inflation directly as well as indirectly on account of the pass-through effect in generalized inflation.

In addition, we expect that global commodity prices, which are already high, will continue rising following positive global cues, namely the decision by the European Central Bank (ECB) and Federal Reserve on open-ended purchase of bonds to support recovery of growth.

We believe that these developments are likely to reduce headroom for the RBI to ease policy rates in its Mid Quarter Review of the Monetary Policy on September 17, 2012 since upside risks to inflation continue to persist in the near-term.

Source : Equity Bulls

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