Inflation up but may cool a bit ahead

Sparked by the increase in electricity tariffs last month, the inflationary dragon has started playing its tricks again.
The fattening of power and gas bills, along with the resurgence in food costs ballooned headline inflation numbers by a whopping 2.42 percent in January. As a result, January CPI raced faster than expected - beating the median consensus forecast by 58bps - by rising 13.68 percent, year on year.
After inflation had fallen by 0.49 percent in the previous month due to a slight decrease in food prices following the festival season, the 1.99 percent hike in the heavy weight food index doesn come as a surprise. In fact, it is likely to cool down in the coming months.
Since CPIs food inflation component is measured in the second week of any month under question, it is best gauged by the changes in weekly Sensitive Price Index (SPI). For instance, if Januarys food inflation is to be measured, it can be best estimated by the SPI between mid-December and mid-January.
Bearing this in mind, and considering that the average SPI between mid-January and February 4 is a mere 0.15 percent as against 0.85 percent between mid-December and mid-January, it is safe to construe that a significant cool down in food inflation is in the offing.
The most profound element last month was an over 13 percent hike in fuel and lighting owing to the revision in power tariffs and a six monthly revision in gas prices. A similar increase in electricity prices might increase this component of CPI again in April.
In contrast, the contribution of fuel and lighting that was 1.01 percent last month would be minimal in next two months, which coupled with easing food inflation will significantly tame the price index in February.
Moreover, the increase in fuel prices including petrol, CNG and diesel for the month of February but recorded in Januarys numbers, increased transportation inflation by 2.96 percent last month. Given the stable international prices in the first two weeks, the impact of this might be negative or neutral in Februarys numbers.
But the worrisome factor that has more impact on monetary policy is the trim core inflation - which after reducing from 15.5 percent in June to a mere 10.4 percent in December, moved upwards again to 12.7 percent last month.
Now with the discount rate at 12.5 percent, it makes more sense to remain cautious than to ease the money supply until and unless inflationary threats subside.
The deterioration in Januarys trade deficit (22%), after imports outpaced exports, month-on-month in January, is a not good omen. This coupled with gradually decreasing workers remittances since September, partly owing to sharp depreciation of the rupee in the open market might dent the current account.
Thus, the rate cut hopefuls in the central banks March review should pray for further improvement in inflation and the current account next month.