Headline inflation steady at 8.58%:: Edelweiss

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n  Headline inflation steady at 8.58%

WPI inflation stood at 8.58% Y-o-Y for October, slightly higher than consensus’ and Edelweiss estimates (8.5% Y-o-Y). Inflation for September stood at 8.62% Y-o-Y, while that for August was revised to 8.82% against 8.51% reported earlier, Y-o-Y. Although non-food manufacturing inflation increased slightly (5.07% in October versus 4.94% in September, Y-o-Y), the broader trend remains one of softening. Sequential inflation data, M-o-M (3MMA), has been showing an uptick since the past two months, but has generally been on a moderating trend through FY11

n  Primary articles: Food articles softening, non food not so

All the major components of headline inflation – primary articles, fuel and manufacturing group – have been on a generally softening trend in recent months. However, what is notable is that the non-food articles component of primary articles has been sticky and has risen meaningfully in October, although food articles component maintained its softening trend. Within non food articles, fibers (primarily led by cotton and jute) and oil-seeds have been the major contributors. However, going forward, inflationary trends in the non food articles group could soften because of the high base effect.

n  Inflation expected to soften; rise in commodity prices pose a risk

We expect inflation to soften (~6.0-6.5% by Q4FY11E) from the current levels, aided by lower food inflation and favourable base effect. However, the key risk to inflation emanates from any increase in commodity prices on the back of monetary easing by global central banks. Our re-arranged inflation data (see our report ‘India Inflation: The delusion of demand overheating’, dated July 07, 2010) suggests that of the total inflation of ~8.60% Y-o-Y, a significant ~300bps is contributed by imported non-food inflation. Thus, any spike in commodity prices may derail the softening trend in inflation.