Higher food prices pushes up WPI inflation - Cholamandalam Securities

For the month of August 2013, WPI inflation was reported at 6.1% (market expectations of 5.8%) vis-à-vis July numbers of 4.86%. The index reading was reported at 177.5 (provisional) for August 2013 as against 167.3 for August 2012 and 175.4 (provisional) for July 2013. June WPI inflation figures were revised upwards to 5.16% from 4.86%; on the back of upward revisions across major components - primary articles, fuel and manufactured products.

- CPI inflation eased slightly to 9.52%YoY in August 2013 from 9.64% in July following a fall in prices of most items, excluding vegetables (up 26.48%YoY). Core CPI inflation moved up to 8.4%YoY, whilst CPI inflation ex-food softened to 8.2%YoY. However, urban areas CPI inflation rose to 10.32%YoY Vs a fall to 8.93%YoY in rural areas. This divergence in inflation has been recorded since June 2013.

- Food inflation remained stubborn at 18.18%YoY, led by steep increase in fruits and vegetables (13%MoM), especially prices of onions (51%MoM), owing to disruption in supplies, due to summer rains, while an increase in transportation costs and shortages in supply of some key perishables, exacerbated price pressures. Downtick was seen in the price of bajra & gram 4%MoM, tea 3%MoM and masur & egg 1%MoM.

- Fuel and Power inflation rose to 11.34%YoY, led by increase in the price of fuel costs, resulting from rising crude prices in international market coupled with weak rupee. Uptick was seen in the prices of aviation turbine fuel (7%MoM) and naphtha, bitumen and high speed diesel (2%MoM each).

- Core WPI inflation (manufactured product ex-food) was reported at 1.94%YoY, implying less impetus for manufacturers to produce more. Upticks were noted in heavy weighted items - basic metals alloys & metal products 0.2%MoM and transport equipment and parts 0.4%MoM, while downticks were witnessed in machinery and machine tools 0.5%MoM, and leather & leather products 0.1%MoM. Other components were largely seen flat.

Outlook:

WPI inflation accelerated at a fastest pace, led by spike in primary articles, particulary vegetables. However, it is expected to fall to acceptable levels in coming months, given good monsoon this year and as weak domestic demand partly offsets high food inflation caused by supply-side bottlenecks. This apart, any reversal in recent monetary tightening, would be greatly determined by the outcome of FOMC meeting, as RBI monetary policy is expected to remain geared towards ensuring stability in the rupee, with an eye on inflation, and hence condition its response accordingly.

Source : Equity Bulls

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