CPI inflation rose sharply to 4.6 per cent in April 2018, marginally higher than market expectations. The uptick was led mainly by core inflation, which exceeded expectations at 5.9 per cent led by broad based sequential increase in sub-categories.
Transport and communication increased to 4.5 per cent from 2.9 per cent, reflecting higher fuel prices, while personal care and effects, and education rose further to 5 per cent and 5.1 per cent, respectively.
Food inflation rose to 4.6 per cent from 2.8 per cent in the previous month, a sequential increase after four consecutive contractions. Vegetable prices contracted 1.6 per cent month on month, while fruit prices increased 4.9 per cent. High frequency mandi data is indicating uptick in vegetable and fruit prices, while prices of pulses and sugar continue to fall.
We have to remain watchful on food inflation given the likely seasonal uptick in prices this quarter along with uncertainty on monsoon and MSP hikes.
Headline CPI is expected to head towards 5.4 per cent by June 2018, partly led by an unfavorable base effect, before moderating towards 4.5 per cent by the end of FY19. Headline and core inflation will likely average 4.6 per cent and 5.6 per cent in FY19 against 3.7 per cent and 4.4 per cent in FY18.
Upside risks exist due to oil and other commodities shocks amid a weak rupee, impending MSP hikes for Kharif crops, and possible implementation of States HRA. A $10 increase in crude could have a 40-50bps impact in FY19 through a commensurate increase in petrol, diesel, LPG etc.
Formulae-based MSP increase can potentially impact inflation by 50-60bps assuming retail prices increase in sync with MSP. WPI inflation rose sharply to 3.2 per cent in April against 2.5 per cent in March based on higher primary food and energy inflation.
Primary food inflation rose 1.9 per cent month-on-month. Within food, vegetables prices rose 6.7 per cent MoM. Energy inflation was up 7.9 per cent after 4.7 per cent in March. Core manufacturing inflation rose further to 3.7 per cent amid a sharp sequential increase led largely by chemicals and chemical products.
Headline and core WPI is expected to trend higher in FY19, with respective averages for FY19 at 3.8 per cent and 4.1 per cent. The worrisome trends in broad based components of core CPI inflation seem to vindicate the MPC’s cautious approach. Even as headline and core inflation in expected to peak in June 2018, pressure on core inflation is expected to sustain during 1HFY18.
Amid various inflation uncertainties, CPI inflation outturn will be crucial in assessing the RBI’s next move. While the probability of a rate hike has increased amid several uncertainties on inflation, RBI may still be on a pause mode for some more time while assessing the incoming data closely.
Source: Economic Times