Weekly Inflation Update

 

Food prices drive up inflation

Wholesale price index (WPI)-based inflation for the week-ended January 10 came in at 5.60% Y-o-Y, above expectations (Edelweiss-5.12% and consensus-5.05%). This is the first rise after a dip of ten consecutive weeks. However, we believe the rise to be temporary reflecting increase in prices of essential commodities owing to the truckers strike from January 5-12. We do not rule out the possibility of a relatively high inflation number in the next week as well due to the same reason. The overall trend for prices in general continues to remain downward with falling prices and weakening demand.

 

Food prices (including manufactured food products) were the primary contributors to the rise in prices during the week owing to the truckers strike. Fuel group inflation remained unchanged.

 

Petro price cut likely to push down inflation

The government is likely to cut domestic petrol, diesel, and LPG prices by INR 5, INR 3, and INR 25, respectively, anytime soon. This is likely to have a direct impact of ~50-60bps on inflation. Moreover, the base effects will turn favorable January onwards. Even if overall prices stay constant at current levels, Y-o-Y inflation is likely to drop to ~2% by March 2009.

 

Negative inflation numbers in CY09 a certainty

Inflation has been declining significantly in recent weeks with the rapid correction in commodity prices. The overall price index has dropped ~5% from its peak in August. With the fast correction in commodity prices, inflation and inflationary expectations have come down significantly. The pace of fall in commodity prices and overall price levels lead us to reiterate our view of a spell of negative Y-o-Y inflation in CY09.

 

Inflation softening fast globally

Globally, inflation is falling fast owing to the sharp dip in commodity prices and sluggish demand. The US Consumer Price Index (CPI) declined 0.7% M-o-M in December. China's CPI during December stood at 1.2% Y-o-Y, slowing for the eighth consecutive month, the slowest rise since July 2006. Inflation across other emerging markets also shows a downward trend.