Don get too excited to see inflation (as measured by the CPI) to be as low as 10.74 percent in September, as reported by FBS: there are two caveats to it. First, due to its recent rebasing, the CPI will appear subdued for some time. Secondly, the first quarter of the last fiscal year has created a high base effect, as well. However, both these caveats will fade away soon. A comparison of the current and past CPI figures based on past and current weightage over the past two years will not produce reliable results, i.e., monthly inflation is higher for few months in previous index and lower in others. So, it would be unfair to assume that inflation has trended lower by 1-1.5 percent under the new base, as appears to be the case in July and August 2011. While the high-base effect (monthly inflation averaged at 2.15 percent in first quarter FY11) will vanish from next month and December onwards a low-base effect would result in higher year-on-year inflation. What is important to see is that monthly inflation averaged at 1.23 percent during the last three months is proving that the trend of rising prices still persists. And, if this trend continues then CPI can reach as high as 15 percent by the end of this year; averaging 13 percent for the full year. This would be a significant overshoot compared to the central banks forecast of 11.5-12 percent. Nonetheless, lets not delve much into the arithmetic and concentrate on macroeconomic indicators instead, that are also building inflationary expectations. SPI, one of the lead indicators of CPI (at least for its food component), has remained in single digits for the past four weeks. This implies that month-on-month inflation in October is likely to be much lower than what it was in the first three months of this fiscal year. At the same time, imported inflation may not be as high this year as given the trend of receding global commodity prices and the bearish outlook for crude oil prices. Still, rupee depreciation has already taken its toll as fuel prices increased this month. On the bright side, the local currency will likely arrest its slide, at least for a few months. With monetary policy to be reviewed on Saturday, odds are now in favour of a cut of 50-100 basis points in the discount rate. Core inflation, however, is marginally increasing and is at 10.6 percent for September (trimmed core at 11.7%). But that should not be driving the monetary policy decision as the same is still much lower than the discount rate and inflation in the country has been more of a supply-side phenomenon, lately. CPI numbers for the outgoing month show that food and beverage prices increased by 1.03 percent over the previous month and 10.46 percent, year on year. Clothing and footwear prices surged by 14.86 percent on account of higher input prices but the rate of increments may slow down in coming months. Transportation owing to high oil prices also increased by 14.91 percent but that may also ease in coming days.
===================================================================== CPI September 2011 ===================================================================== Group Weight (%) yoy chg (%) mom chg (%) ===================================================================== General 100 10.46 1.03 Food & non-alcoholic beverages 34.83 9.69 1.66 Non-perishable food 29.54 14.25 0.58 Perishable food 4.99 -9.94 8.04 Clothing & footwear 7.57 14.86 1.37 Housing, water, fuels 29.41 7.89 0.11 Transport 7.2 14.91 0.79 =====================================================================
Source: FBS
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