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India
The core of the matter: Core inflation drives up WPI in May
India's May WPI headline inflation rose to 9.1% y-o-y (vs. 8.7% in April), which was above consensus but in line with
our forecast. Food and energy price inflation eased, but core inflation jumped. The RBI has more work to do and the
next rate hike will come on June 16.
Facts
WPI inflation rose in May to 9% y-o-y (vs. 8.7% y-o-y in April), which was above consensus (8.7%) but was in line with our
forecast. Monthly sequential inflation rose to 0.5% m/m sa (vs. -0.2% in Apri), but declined to 6.5% 3m/3m SAAR (vs.11.4%
in April) according to our estimates.
Core inflation (non-food manufacturing) jumped to 7.2% y-o-y (vs. 6.2% y-o-y in April) and the increase was relatively broad
based. Sequential core inflation rose 0.8% on a m/m sa basis (vs. 0.2% in April), but slowed on a 3m/3m SAAR basis (7.6%
vs. 10.8% in April).
Primary food inflation "eased" to 8.4% y-o-y (vs. 8.7% in April), but mineral prices rose faster at 11.9% y-o-y (vs. 7.4% in
April). Non-food primary inflation and energy prices declined to 22.4% y-o-y (vs. 27.3% y-o-y in April) and 12.3% y-o-y (vs.
13.3% in April), respectively.
Another interesting point was yet another upward revision to historical numbers. This time March WPI reading got pushed
up from an original estimate of 9 to now 9.7% y-o-y. This tendency to revise inflation readings a few months back also likely
partly explains why we have seen a decline in 3m/3m sequential inflation numbers.
Implications
While growth is showing early signs of cooling, the inflation readings are so far not budging, staying stubbornly high.
This is, as discussed before, a story of changing inflation dynamics from the supply to the demand side. We have a pull in both
directions, which will leave us in the 8-9% zone for a while. While food and other primary inflation readings are coming down,
this is being countered by rising energy prices, except for this time around, and a demand-led uptrend in core inflation.
Why is core inflation being pushed up when growth is moderating? Simple, capacity is still very tight because demand remains
in excess. Even as growth moderates in response to higher policy rates and the uncertainty associated with the elevated level of
inflation, capacity will remain tight for a while still (i.e. until growth decelerates sufficiently and for an extended period).
In that context, it is also worth keeping in mind that annual inflation readings for food are currently lofty despite last year's
high base. Moreover, the government is expected to allow for an upward adjustment in diesel prices. Finally, with demand-led
pressures now a key driver of inflation dynamics, the pass-through of higher input costs to end-consumers will be expedited
and add to the upward pressures on core inflation.
With a backdrop like this, the RBI is facing more challenging inflation dynamics and with continued upward surprises, there
is a heightened risk that inflation expectations could get unhinged. All of this spells more policy tightening and the next move
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India
The core of the matter: Core inflation drives up WPI in May
India's May WPI headline inflation rose to 9.1% y-o-y (vs. 8.7% in April), which was above consensus but in line with
our forecast. Food and energy price inflation eased, but core inflation jumped. The RBI has more work to do and the
next rate hike will come on June 16.
Facts
WPI inflation rose in May to 9% y-o-y (vs. 8.7% y-o-y in April), which was above consensus (8.7%) but was in line with our
forecast. Monthly sequential inflation rose to 0.5% m/m sa (vs. -0.2% in Apri), but declined to 6.5% 3m/3m SAAR (vs.11.4%
in April) according to our estimates.
Core inflation (non-food manufacturing) jumped to 7.2% y-o-y (vs. 6.2% y-o-y in April) and the increase was relatively broad
based. Sequential core inflation rose 0.8% on a m/m sa basis (vs. 0.2% in April), but slowed on a 3m/3m SAAR basis (7.6%
vs. 10.8% in April).
Primary food inflation "eased" to 8.4% y-o-y (vs. 8.7% in April), but mineral prices rose faster at 11.9% y-o-y (vs. 7.4% in
April). Non-food primary inflation and energy prices declined to 22.4% y-o-y (vs. 27.3% y-o-y in April) and 12.3% y-o-y (vs.
13.3% in April), respectively.
Another interesting point was yet another upward revision to historical numbers. This time March WPI reading got pushed
up from an original estimate of 9 to now 9.7% y-o-y. This tendency to revise inflation readings a few months back also likely
partly explains why we have seen a decline in 3m/3m sequential inflation numbers.
Implications
While growth is showing early signs of cooling, the inflation readings are so far not budging, staying stubbornly high.
This is, as discussed before, a story of changing inflation dynamics from the supply to the demand side. We have a pull in both
directions, which will leave us in the 8-9% zone for a while. While food and other primary inflation readings are coming down,
this is being countered by rising energy prices, except for this time around, and a demand-led uptrend in core inflation.
Why is core inflation being pushed up when growth is moderating? Simple, capacity is still very tight because demand remains
in excess. Even as growth moderates in response to higher policy rates and the uncertainty associated with the elevated level of
inflation, capacity will remain tight for a while still (i.e. until growth decelerates sufficiently and for an extended period).
In that context, it is also worth keeping in mind that annual inflation readings for food are currently lofty despite last year's
high base. Moreover, the government is expected to allow for an upward adjustment in diesel prices. Finally, with demand-led
pressures now a key driver of inflation dynamics, the pass-through of higher input costs to end-consumers will be expedited
and add to the upward pressures on core inflation.
With a backdrop like this, the RBI is facing more challenging inflation dynamics and with continued upward surprises, there
is a heightened risk that inflation expectations could get unhinged. All of this spells more policy tightening and the next move
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