Inflation may head north on Paris terror attacks

Diminishing base effect and soaring pulses and onion prices have caused the inflation to rebound over the last few months, but the months ahead could see it climbing up further on Paris terror effect, which is threatening to push up crude oil prices due to geopolitical instability in some parts of the world.

The government data put out on Monday showed wholesale price index (WPI) inflation for October inched up as it fell at a lower rate of -3.8% compared with 4.5% the month before. Consumer Price Index (CPI) inflation for the same month has come at 5% as against 4.4% in the previous month.

Ranen Banerjee, leader, public finance, PwC India, said inflation was firming up due to the effect of base prices wearing off. Besides, he also sees inflation getting fuelled by reaction to France terror attack and winter demand, which could fire up crude prices if the supply were to get disrupted.

According to him, winter months usually see food prices slip but he expects rise in petrol price to be comparatively higher.

"Reaction to France terror and winter demand could put pressure on oil prices and if this disrupts the supply side, then that will pull up inflation. It (rise in petrol prices) could be balanced by decline in food prices (which usually occurs in second half of the year) but it may not be fully compensated by it," he said.

Sujan Hajra, chief economist- AnandRathi Financial Services, believes WPI had bottomed out, but expects it to continue to deflate for rest of the current fiscal.

"The index tends to fall in second half (H2), which might result in continuing WPI deflation for the rest of FY16," he said in a statement.

Deflation in WPI in October was primarily checked by food and fuel prices rising. Even deflation in manufactured product was lower at -1.7%.

The jump in food inflation was significant at 1.7% compared to 0.2% in September while contraction in fuel and power prices was also lower at -16.3% from an all-time low of -17.7% in the month before.

Core, which has been in deflation over the last 10 months, was unchanged at -2.9%, while month-on-month (MoM) non-core deflation was lower at -4.9% versus -6.3%.

As per AnandRathi analysis, WPI has slipped 1,133 basis points (bps) over the past two years. Hajra said Monday's data revealed there was a "broad-based" pullback among components of WPI.

"We see a broad-based pullback among the components. The broad index has risen for third consecutive month. Pulses inflation is above 40% and, for the past one year, has been galloping. Also, onion inflation, in the past three months, has risen at an average 90%. On the other hand, the contribution of food inflation to the rise has been higher than that in fuel and manufactured products," he said in a statement issued by the brokerage.

October saw steep deflation in basic metals, textiles, rubber and plastic products. Even the Indian basket of crude-oil prices has been low, mirroring the double-digit deflation in fuel and power.

The AnandRathi economist does not see rebound in manufactured-product inflation any time soon; "The surplus global capacity and the slowdown in global recovery would prolong the capex cycle, so a turnaround in manufactured-product inflation looks distant".

Richa Gupta, senior director, Deloitte India, pointed to erosion in the base effect and rise in prices of certain items for reversal in WPI deflation last month.

"The prices of pulses rose by 9.2% over the last month and inflation stood at 53% for pulses as a category and it appears that the imports have not been able to quell the prices. Separately, insufficient rains during the monsoons seem to be having a limited effect on vegetables as overall inflation remains muted at 2.56% but inflation in onion prices has remained high and stands at 85.7%. Overall, WPI is likely to remain in negative territory in the near term as global commodity prices remain subdued," she said.