Wholesale prices softer, RBI to stay cautious on food inflation

Wholesale prices softer, RBI to stay cautious on food inflation. As expected, fruits and vegetables inflation in July restricted any significant softening in headline WPI inflation trajectory, even as core WPI moved lower. Barring fruits and vegetables, on a yoy basis, most of the key components saw inflation falling or remaining stable, except for manufactured food products. However, the overriding concern on the food price inflation will keep the RBI on a cautious stance. Read Full Report

Vegetables lead WPI inflation higher

Vegetable prices increased 23% mom leading to WPI inflation remaining above the 5% mark. This was expected and the trend in vegetable prices was mirrored in the CPI inflation release earlier. Exhibit 1 shows the indicative price increase in July compared to last month. Given the higher weight of food in CPI, the impact of higher vegetable and fruits inflation was different for headline CPI inflation than for headline WPI. July WPI inflation came in at 5.19% (June at 5.43%). This compares with headline CPI inflation of 7.96% (June at 7.46%).

Core inflation softens but momentum remains unchanged

Core (non-food manufactured products) inflation fell sharply to 3.58% after a print of 3.91% in June. On a yoy basis, there was softening across almost all of the components. For the core index, momentum remained unchanged (mom seasonally adjusted) and showed an uptick on a 3m/3m annualized basis. Some of the recent depreciation in the currency will likely feed into the core inflation over the next few months. This will likely keep the core inflation stable for the next few months. However, we will need to closely watch the changes in core inflation to gauge the impact of the recent uptick in consumer sentiments on core inflation.

Wholesale inflation will be of limited importance in RBI’s policy

After the establishment of headline CPI inflation as the nominal anchor, the WPI inflation seems to be the less favored child. The most important information is to be derived from the core inflation that can also provide some indications of changes in the imported inflation apart from the likely pricing power of manufacturers. With core inflation remaining stable, there is unlikely to be many other cues that one can draw from the WPI reading. We expect headline inflation to average 5.2% in FY2015 with core inflation remaining at around 3.5% to 3.6% for the rest of FY2015.

RBI’s likely focus for monetary policy: 6% retail inflation