CPI: food-driven month-on-month rise

When the CPI numbers for March FY12 were released yesterday, the sharp spike in month-on-month inflation was quite surprising, though the year-on-year figure clocked in at 10.8 percent. For the year-to-date average for 9MFY12, the CPI also netted at 10.79 percent, as opposed to nearly 14 percent in the same period last year. Receding commodity prices and a high base effect is bringing some decency to the abnormally high inflation witnessed in the last few years. Food inflation turned out to be the biggest contributor to the month-on-moth increase, owing plausibly to the cyclical nature of food prices due to sharply changing local supply dynamics. Both perishable and non-perishable food commodities registered over a percentage point increase this month, with pulses and grams leading the increase in food prices for the month. Also worth mentioning is the clothes and footwear subindex, which showed the highest month-on-month and year-on-year increase so far this fiscal year in March. This can be attributed to a demand-driven increase in lawn cloth prices, which increased by about 10 percent in the first week of March on a week-on-week comparison. Additionally, high raw material prices from last year may also have affected clothing prices after a lag, contributing to the increase. Further, prices of footwear also increased by about 14 percent on a month-on-month basis. The transport subindex, with its revised higher weight and ever-increasing international oil prices is showing signs of stress. Its impact is going to be even worse in the ongoing month with local fuel prices having crossed a century at the beginning of April. Needless to say, this will have a second round impact on the overall consumer basket in the coming few months. Nonetheless, fuel prices are still cheaper than our neighbouring country India, a case to discuss more sooner. As for the housing, water, electricity and gas subindex, the month-on-month increase was relatively lower than that seen for the above-mentioned indices. Going forward, SPI numbers for the last weeks of the previous month, which will be used in computing inflation figures for April, have not shown any phenomenal increase. Therefore, with a high-base effect brought on in March, on a month-on-month basis, food inflation is not likely to bring about much of a spike in the CPI. However, as wheat procurement will take full swing in the coming quarter, the raised wheat support price - up by Rs 100 per 40 kg to Rs 1,050 per 40 kg - will do its part contributing to inflationary pressures. At the same time, the hefty increase in fuel prices at the beginning of April, - over eight percent for petrol and 14 percent for CNG - will be the back-breaker as far as CPI for April is concerned. Yet, with the 9MFY12 average still netting much lower than the discount rate at 12 percent, it won be surprising to expect a rate cut in the upcoming monetary policy. All in all, the year-on-year average inflation for FY12 appears likely to stay within SBPs targeted 12 percent for the year, but getting it into single digits next year appears to be a far-fetched idea.

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Major CPI groups - March 2012
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                               Y/Y chg (%      M/M
                                 chg (%)   chg (%)
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CPI general                        10.79      1.17
Food & non-alcoholic beverages      9.81      1.54
Non-perishable                      9.02      1.36
Perishable                         14.82      2.66
Housing, water, elec,               7.55      0.04
gas & other fuels
Clothing & footwear                16.60      3.35
Transport                          19.10      1.94
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Source: PBS