Retail inflation at 17-month high in Dec ’17

Two crucial macro numbers – retail inflation for December and factory output for November – released by the government on Friday indicate that the economy could well be on the recovery path.

The Index of Industrial Production (IIP) data published by the ministry of statistics and programme implementation (Mospi) shows that the factory output had shot up to 25-month high of 8.4% in November after a tepid growth of 2% (revised from earlier 2.2%) in the month before.

Simultaneously, the ministry also put out the Consumer Price Index (CPI) inflation number, which continued to be elevated at 5.2% last month compared with 4.88% in November.
 December’s retail inflation was pushed up mainly due to sharp rise in prices of fuel, food, vegetables and housing.

As per the ministry statistics, consumer food price index (CFPI) inflation was 4.96% last month against 4.35% in November. It was 1.37% in the same month last year. The items which saw huge uptick in prices were vegetables (29.13%), eggs (9.48%), housing (8.25%) and fuel and lights (7.9%). Pulses and product prices slipped 23.47% last month. Core inflation was static at 4.9%.

D K Srivastava, chief policy advisor, EY India, told DNA Money that the rise in food and vegetable prices were due to seasonal factors. However, he said, the CPI inflation was also being pushed higher due the “underlying pressure from higher global crude prices”.“It’s (CPI) driven by cost-push factors, particularly, petroleum prices,” said the EY economist.

Aditi Nayar, principal economist of credit rating agency Icra, said last month’s retail inflation has come in “a little higher” than her expectation. On the strong IIP growth, EY’s Srivastava said factory production was building up as adverse effects of demonetisation and other such incidences were wearing off. At the same time, he also feels that one would have to wait to see whether the sharp jump was only on account of base effect or was demand-driven.

“There is a base effect but overall there is a (economic) recovery happening. The main message is that last year was somewhat depressed because of demonetisation and other incidences. We are now beginning to see that those adverse impacts are over and the economy is now mending itself,” he said. Icra’s Nayar said the surge in November factory output is most likely to sustain in December.

“The favourable base effect do suggest that at least December may take you to higher IIP growth but it’s (high IIP) sustenance in Q4 (fourth quarter of the current fiscal) would depend on whether this is just is an inventory rebuilding or if demand is indeed rising to sustain these (IIP) levels,” she told DNA. 

The Mospi stats also reveal that factory output in November scaled up mostly because of growth in production of consumer non-durable goods that jumped 23% that month against 3.3% last year. Consumer non-durable goods are items which are non-perishable.
November saw manufacturing grow at 10.2% against 4% in the same month last year. Infrastructure and construction output in the same also grew at a healthy clip of 13.5% versus 3.9% a year before. 
“Infrastructure and construction is being pushed by government’s release of capital expenditure. There is also a low base effect in this,” said Srivastava. 

Primary goods, capital goods and consumer durable goods grew by 3.2%, 9% and 2.5% respectively in November. Growth in primary goods and capital goods was lower than last year when it was 5.5% and 6.8% respectively.