CPI inflation to remain at higher levels: CARE

CARE Ratings has come out with its report on inflation for February 2013. According to the rating agency, CPI inflation is expected to remain at higher levels as pressures from food side are not expected to ease anytime soon.

The annual rate of inflation, based on monthly WPI, stood at 6.8% for the month of February, 2013 (over February, 2012) compared with 6.6% for the previous month and 7.6% during the corresponding month of the previous year. Build up inflation in the financial year so far was 5.7% compared with 6.6% in the corresponding period of the previous year. Retail inflation for the month has come at 10.9%.

The upward pressure on headline inflation is on back of upward revision of diesel prices and further decision to adjust prices on monthly basis introduced by government in mid- January 2013. With this policy to be persevered in future, inflationary pressures would continue to be exercised on this count.

Pressures on the side of food articles still remain high, as inflation in this segment moved from 67.1% in February 2012 to 11.4% in February 2013. Inflation in primary food articles segment is mainly the result of supply-side constraints. The severe winter in the northern food producing states of the country have affected the supply of specific crops. This has resulted in lower production in several crops especially in the groups of vegetables, cereals, pulses and oilseeds in the current year.

Fuel and power category, inflation stands high at 10.5% in February 2013 compared to the corresponding period last year at 5.1%. This clearly indicates that the impact of the hike in diesel prices by Rs.0.45 per litre on a monthly basis introduced by the government of India in mid -January has entered the system. Secondary impact would also get reflected gradually in course of time as transportation costs are revised to accommodate higher fuel costs.

Relief in inflation was in manufactured products segment with moderation being witnessed at 4.5% when compared with 5.8% in February 2012. This is mainly attributed to moderation of global commodity prices as well as prevailing weak demand conditions. Subsequently, the declining pricing power of the manufacturers has prevented hike in the prices of manufactured products.

Monetary policy action
With increase in headline inflation on the back of rising fuel prices and the retail inflation continuing to remain high at 10.9%, raises concerns for the RBI to make any decisions regarding further rate cuts. CPI inflation is expected to remain at higher levels as pressures from food side are not expected to ease anytime soon. In the long run measures to increase supply are the only way to have non inflationary growth. Further, the decision of the government to adjust diesel prices on monthly basis by Rs. 0.45 per litre shall further push up WPI inflation numbers.

Disclaimer: This report is prepared by the Economics Division of Credit Analysis &Research Limited [CARE]. CARE has taken utmost care to ensure accuracy and objectivity while developing this report based on information available in public domain. However, neither the accuracy nor completeness of information contained in this report is guaranteed. CARE is not responsible for any errors or omissions in analysis/inferences/views or for results obtained from the use of information contained in this report and especially states that CARE (including all divisions) has no financial liability whatsoever to the user of this report.

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