CPI refuses to budge: Why whiff of stagflation is not going away yet

The news on the price front isn't good. Just as the rupee is moping and groping within a stone's throw of 60 to the US dollar, today's Consumer Price Index (CPI) has practically refused to budge.

The May CPI has printed at 9.31, down just a wee bit from April's final number of 9.39 percent. The rupee and the price index are joined at the waist since India imports 80 percent of its oil, and a fall in the rupee raises fuel prices back home even if they are falling abroad.

The composition of CPI inflation is worrying. The key drivers are cereals and pulses (up 16.29 percent due to a lower-than-expected rabi) and eggs, fish and meat (up 12.52 percent) - which keeps overall food and beverages inflation in double-digits at 10.65 percent. These two components - cereals and eggs, fish et al - comprise a third of the weight in the food part of the CPI. Food is half of the CPI.

The whiff of stagflation is not gone yet, despite some green shoots of recovery here and there.

The whiff of stagflation is not gone yet, despite some green shoots of recovery here and there. AFP

Ironically, what is interesting is that the fuel index - with a 9.5 percent weight - is below the overall CPI number at 8.55 percent, thanks to the global weakening of commodity prices. But if the rupee keeps declining and falling, fuel price hikes will start pushing the CPI up even when other elements start weakening.

The following are the factors most likely to keep CPI inflation high and growth weak.

One, election spending and possible increases in minimum support prices (MSPs) for rice and wheat due to the advent of the Food Security Bill are clear negatives. Cereal inflation is already high and it just needs the pep of MSPs to catch fire again. Cereals have a weight of 14.59 percent in the CPI.

Two, fuel. Even as the Indian basket of crude has been falling globally, in rupee terms it is rising. From Rs 5,616 a barrel in the second half of May, the rupee price per barrel is now closer to Rs 5,940. And the diesel subsidy, which had come as low as Rs 3 a litre some time ago, is edging up towards Rs 5. These prices either have to be fed through to the petrol pump - which raises CPI - or they will show up as higher fiscal deficits, if subsidies remain high. Neither is good for growth or inflation.

Three, the rupee's decline, of course, needs no special emphasis. It will give inflation a direct leg up beyond oil prices, since we are bigger importers than exporters. Corporate profits are negatively impacted by a failing rupee, since most Indian companies have dollar-denominated debts, often without a natural hedge through exports. When corporate profits are pressured, investment demand will remain sluggish. Without a pick-up in investment and growth, the fiscal deficit will loom larger and tax revenues will also be weak.

Four, the Index of Industrial Production for April, released today, shows a sharp deceleration in consumer durables (-8.3 percent) and an acceleration in non-durables (daily necessities, etc) by 12.3 percent. This divergence shows that people are postponing big-ticket purchases (like fridges or LED TVs), and focusing in essentials. This is negative for growth sentiment even though the IIP printed at 2 percent in April.

Five, the rupee's decline will also mean that the RBI will go slow with its rate cuts in order to attract more foreign inflows. Right now, FIIs are heading for the exits in debt. The leg up that industry is expecting from lower interest costs will be further delayed.

The prognosis is simple: the signals for growth are still weak, and the signs of inflation dying are far from clear. The only positive may be in the wholesale prices index (WPI), but that's not what bothers you and me. It is a sign of weak corporate growth.

The whiff of stagflation is not gone yet, despite some green shoots of recovery here and there.


Updated Date: Dec 20, 2014 19:24 PM

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