Comment

With primary food inflation wallowing in the negative zone for the last two weeks of December 2011, the headline inflation rate for that month has, not unexpectedly, eased sharply to 7.47% from 9.11% during the preceding month. A year ago, the inflation rate had ruled at 9.45%.

The prime mover behind this precipitous plunge in the inflation number last month index was the dramatic deceleration in the primary articles group — to 3.07% from 18.37% over the year as both fuel & power (to 14.91% from 11.26%) and manufactures (to 7.41% from 5.39%) had in fact exhibited a hardening tendency.

But any rejoicing may be premature, for the underlying data do not point to any abatement of inflationary pressures. For one, the current moderation is being led largely by seasonal factors and, in particular, the steep fall in vegetable prices — mainly onion and potato — and in wheat.

For another, the movements with regard to manufactures’ inflation — which may sway the Reserve Bank of India more than any other number, including the overall inflation figure — are disturbing. It had crossed the 6% mark in February last and had stayed above the 7% level ever since.

Moreover, from the sources of inflation now and a year ago, it would appear that the central bank’s efforts to lick inflation from the demand side via monetary tightening have borne little fruit.

In December 2011, while the price spurt in manufactures was as high as 7.41%, in terms of weighted percentage contribution, it was of the order of 58% as against only 34% during the same month of 2010.

The upshot of this is that manufactures have emerged as the main segment from which inflationary pressures are being generated during the current fiscal year. Empirical evidence suggests that this situation may get entrenchedand thus influence the headline inflation rates too in the months ahead. If this is taken cognisance of, RBI may be induced to change its monetary stance, now tilted heavily towards breaking the back of the price spiral and, more important, overcoming the inflationary psychosis.

Further, the economy is still insulated from the price trends in crude prices and the index therefore, reflects, the price revisions in petroleum products effected months ago.Even so, though the fuel & power group index has risen to 14.91% in December 2011 from 11.26% last year, the relative contribution of this group has now increased to 31% from 18%. Sooner or later, another bout of upward revision in important petroleum products is inevitable, with its inflationary consequences. If the status quo is opted for, due to political reasons, it too may have inflationary impact via the expanding fiscal deficit.

A closer look at the wholesale price index for December 2011 reveals that the so-called easy sentiment in the prices of primary products, especially food articles, may be shortlived. On the face of it, primary articles have decelerated to a low of 3.07% now from a high of 18.37% a year ago and in respect of food articles, the moderation has been very pronounced — to a mere 0.74% from 15.07%. It is therefore no surprise that the weighted contribution of this group and subgroup to the December inflation number is markedly lower than what it was earlier — 11% compared to 48% for primary articles and 2% as against 28% for food articles.

Delving deeper, it can be inferred that the downward trend in food inflation stems from a limited number of commodities — notably vegetables, with a decline of 34.18% over the year. Wheat, too, has eased somewhat.But jowar has become dearer by 28.63%, maize by 16.58% and bajra by 7.50%. Pulses, fruits, milk and eggs, meat & fish are ruling much higher.

The story is broadly similar in respect of manufactured food products with edible oils up by 11.52%, dairy products by 16.78%, canned and processed food by 12.65% and salt and sugar by nearly 5%. The upshot of this is that, in the headline inflation rate for December 2011, the contribution of food products has jumped to 8% from 2% a year ago.

Once the seasonal factors wear themselves out - one may add, also the dragging effect of the high base period figures - primary food inflation may resume its upward journey; with manufactures not responding to monetary measuresand fuel prices slated to harden - the December 2011 inflation rateshould not be invested with much significance unless it is a harbinger of a trend.