CPI: Taking a nap

The cyclical upward movement in food inflation and the partial passing of the international oil price hike and its impact on other items pushed the consumer price index higher by 1.48 percent month-on-month during March. The CPI index had fallen 0.74 percent month-on-month in February.
The high-base effect is playing its role as year-on-year inflation increased by 13.16 percent - lower than the average of 14.59 percent for the first half of the fiscal year - taking the nine-month price hike to 14.2 percent. The high-base would also make April numbers modest despite the hike in fuel prices and its trickle down impact.
The latest numbers are a little less than analysts forecast and the catch is in the change in the recording practice of petroleum prices. Previously, the FBS used to take the impact of change in petroleum prices in the preceding month i.e. fuel price revision for November used to be recorded in October just because the new prices were announced on October 31.
Principally, that was a flawed method as it reflected a change in prices in a month in which the goods or services were not consumed at that rate.
This column and other analysts were quite vocal about this anomaly; the issue was finally debated within FBS quarters after the issue of fuel price reversal in January that led to the re-announcement of official inflation numbers.
Now the FBS is recording the change in petroleum products for the month which matters. For example, although fuel prices for March were announced on February 28, they were recorded in March CPI and not in February.
Thats why the CPI is showing around a 5 percent change in petrol and diesel prices versus market expectations of a change of 9-13 percent. However, in April, the transportation and communication index may contribute 0.5-0.7 percent increase in the monthly CPI.
With the SPI falling by 0.5 percent in the last three weeks of March, the food component of CPI inflation can be expected to offset the impact of hike in petroleum prices, and its trickle down impact is expected to take this months year-on-year inflation between 12-12.5 percent.
Coming back to March, the year-on-year increase in the House Rent Index (which has the highest weight in core inflation) continued to hover around 6 percent - an encouraging fact since it depicts that monetary tightening in the last six months or so is working.
Similarly, non-food-non-energy inflation is persistently moving in the range of 9.2-9.5 percent for the past eight months, which also points to the effectiveness of the monetary policy.
Still, higher food and energy prices are spoiling the party. In the medium term, the more than 20 percent increase in the Wholesale Price Index suggests that CPI will eventually surge in the coming months and dilute the impact of the high-base effect. And the biggest risk to prices is the hike in international oil prices, which is likely to offset the impact of expected ease in global food prices surge.
The ADB in its recent country outlook projected FY12 inflation at 13 percent and FY11 at 16 percent. While the latter does appear to be too high, rest assured that the inflationary dragon is not dead yet.