Inflation is down, but producer prices buck the trend

Inflation for the month of July shows a slight dip to 9.22%, compared to the 9.44% seen in the previous month. One could argue if a drop of one-fifth of a percentage point is significant, but lower inflation, however small the actual decline, is a good thing.

The government releases overall inflation data monthly, while primary inflation data (food and non-food) and fuel price behaviour is released on a weekly basis.

The deceleration in inflation is welcome, and may also lead some to believe that the Reserve Bank of India’s actions of hiking interest rates are working. But the break-up of inflation into primary, fuel and power and manufactured products shows it may think otherwise.

Food prices have mended their inflationary ways, which is old news. The ascent in non-food articles (such as fibres and minerals) too has slowed down. They collectively represent primary articles and have a weight of 20% in the wholesale price index.

Fuel and power too are stable, though much of this is a result of administered prices, otherwise they would be much higher. They carry a weight of 14%.

On these two counts, one might say the price situation is showing a favourable trend.

But inflation in manufactured products, which has a weight of about 66%, is not showing signs of slowing down, and from about 6.3% in February is up at 7.5% in July 2011.

Rising prices of factory-made goods is what is worrying the RBI, as it interprets that as companies enjoying pricing power, driven by healthy demand.

What’s more, the weekly data is now showing food prices reverse trend and again begin a climb. Whether that trend sustains will be clear in a few weeks.

The good news is that industrial production is robust, with the index of industrial production for June 2011 up by 10% over the same period, a year ago. That is a very good number. What it also does, unfortunately, is strengthen the hands of those who believe –such as the RBI- that growth is yet to really get affected by rising prices or interest rates.

With little evidence that growth is getting adversely affected by rising interest rates, the RBI may not find itself under pressure to pause or cut interest rates.

Factory goods turn expensive
Inflation data – June 2011, Wholesale price index (WPI), Year on Year Growth (%)

Source: Ministry of Commerce and Industry
Inflation data - June 2011, WPI, Year on Year Growth

Read the press release and find more detailed data here.

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