Published on 15/02/2017 2:59:32 PM | Source: Religare Capital Markets Ltd

India Economics - WPI inflation spikes on surge in fuel inflation - RCML

* WPI inflation spiked to a 30-month high of 5.2% in Jan’17 from 3.4% in the preceding month, surprising on the upside (consensus: 4.2%). The surge is entirely due to a sharp increase in crude petroleum and mineral oil inflation. Excluding these items, WPI inflation was much lower at 3% (Dec’16: 2.1%).


* Inflation in crude petroleum and mineral oils – together 10.3% of WPI by weight – shot up to 26.5% in Jan’17 from 15.4% in Dec’16, adding ~110bps to the headline number. Inflation in these items is largely a function of global crude oil prices, which were up 78.8% YoY in Jan’17 on account of a favourable base effect – prices had fallen to record lows in Jan’16 (US$ 30/bbl). Besides, the OPEC’s decision to cut output led to a rally in crude prices since Dec’16.


* Inflation in primary food articles (weight: 14.3%) remained subdued at -0.6% in Jan’17 (Dec’16: -0.7%) on account of continued disinflation in pulses (to 6.2% vs. 18.1% in Dec’16). Prices of pulses have eased over the last six months on the back of a healthy kharif output (+57% YoY as per first advanced estimates). Vegetables inflation came in at -32.3% YoY in Jan’17 (Dec’16: -33.1%). Vegetable prices have fallen by ~40% since Jul’16 due to good rainfall and demonetisation-induced distress sales. Pulses and vegetables are also responsible for the decline in CPI.


* Inflation in manufactured food products (weight: 10%) stayed elevated at 10.1% YoY in Jan’17 (Dec’16: 10.7%) – this is the 7th consecutive month of a double-digit increase. Inflation in sugar remained high at 21.3% YoY (Dec’16: 25.5%) despite easing slightly over the last few months. Domestic sugar production is estimated to have declined by 10-11% in FY16 and is unlikely to improve in FY17 due to lower sugarcane production during the year (-13.3% YoY as per first advanced estimates for kharif 2016).


* Core WPI (mfg. ex-food products) inflation rose to a 28-month high of 2.7% in Jan’17 from 2.2% in Dec’16. The upmove was largely a result of rising metal prices; core WPI excluding basic metals remained unchanged at 1.4%. Both headline and core WPI inflation have risen steadily over the last 18 months, led by moderating deflation in global metals, fuel and other commodity prices. Inflation in the IMF’s Commodity Price Index moved up to +40.8% in Jan’17 from -40.5% in Aug’15.


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