Second order derivative “core” WPI inflation accelerates in July ::Macquarie Research,

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Second order derivative “core” WPI
inflation accelerates in July
Event
􀂃 India announced wholesale price index (WPI) for July.
Impact
􀂃 Headline inflation remains high in July: WPI inflation for July came in at
9.22%YoY, broadly in line with consensus expectation (as per Bloomberg
survey) of 9.2%. This compares with 9.44%YoY registered in June. The data
for the month of May was also revised upwards to 9.6%YoY from 9.1%YoY
reported earlier. Headline WPI inflation has remained above the Reserve
Bank of India’s (RBI’s) comfort zone for the past 20 months, averaging 9.4%
during this period.
􀂃 Second order derivative “core” inflation picks up further: Non-food
manufactured inflation, an indicator that RBI tracks as a measure of core
inflation, accelerated to 7.5%YoY in July from 7.2%YoY in the previous
month. Indeed, this measure of core inflation has now accelerated to above
7%YoY over the past 6 months compared to an average of 5.3%YoY over the
previous 12 months, indicating a spill over of supply shocks to generalised
inflation through the input cost channel as well as the inflation expectations.
The pick-up in non-food manufactured inflation in July was driven by higher
prices of basic metals, alloys & metal products (10.1%YoY vs. 8.9% YoY in
June), chemicals & chemical products (7.9%YoY vs. 7.4% YoY in June) and
transport, equipment & parts respectively.
􀂃 Food inflation decelerates; non food remains sticky at high levels: Food
inflation (primary plus manufactured) decelerated to 8%YoY from 8.4%YoY in
June. Non-food inflation, on the other hand, remained largely sticky at
9.7%YoY in July (vs. 9.8% in the previous month).
Outlook
􀂃 Inflation to peak by Aug/Sept; global commodity prices are the key:
Considering that oil and other global commodity prices have come off over the
last few days in the context of US debt downgrade and evolving debt issues in
Europe, this will help to contain inflationary pressures. We expect headline
inflation (WPI) to remain sticky in FY12 and average around 9%YoY level. On
the monthly trend, we expect headline inflation to peak over the next 2-3
months and moderate to around 8%YoY in December 2011. We expect
inflation to reach near 7-8% YoY range as of end-March 2012.
􀂃 Policy outlook: We were expecting another 50bps hike in policy rates in the
rest of 2011. While high “core” inflation and hawkish rhetoric from policy
makers makes us believe that the RBI will continue on its anti inflationary
stance, the adverse global environment, on the other hand, suggests that the
RBI might be a little less aggressive than what we have been expecting. We
think the RBI has some time before the next policy review on September 16th
to monitor the global developments and the sustainability of commodity prices
to trend lower.