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21 Apr 2017


Brief: Inflation on a rising trend but within the RBI's range of 4% (±2%); while headline inflation remains low due to fall in food and fuel prices, core inflation is a cause of worry at the consumer level; Wealthier states as well as states that underwent recent elections have been recording a higher inflation as compared to poorer states

Impact: Negative (for consumer); Positive (for industry)

The CPI inflation continues with its acceleration for 3rd consecutive month and recorded 3.81% in Mar 2017. Even though the CPI inflation is much lower than the previous year, when it stood at 4.8%, the recent rise is a cause of worry. However, the inflation rate is within the targeted range of 4% (±2%) at least for now. Pulses and vegetables that accounts for 8.4% in overall inflation have recorded (-)12.4% and (-)7.2% of de-growth in Mar 2017. The pulses price was moving nearly 30% for 20 months before falling to 4.11 in October, 2016. SMERA attributes the negative growth in pulses price to the base factor and higher production in current financial year. On the other hand, vegetable prices are moving at a negative trend for the last 7 months despite a 0.3% contraction in production and lower base price. We believe the lower vegetable price may be attributed to changing consumer preference favoring protein based items such as meat, fish, egg, milk and pulses; these products have now become more accessible due to efficiency in supply chains. Another important reason has been the immense improvements in transport and warehousing infrastructure, as wastage of vegetables has come down significantly. As per Central Institute for Post-Harvest Engineering and Technology (CIPHET) estimates, overall vegetable wastage in around 4.6%-15% of production in a year.

Sugar price, in contrast, are growing at nearly 20% for the past 11 months. Price of the commodity has been witnessing negative rate for last three years during FY14 to FY16 and therefore, spike in sugar price is owing to base factor. Additionally, demand for sugary foods has been rising and combined with restricted global as well as domestic supplies, prices are moving in an upward trend.

At state level, inflation rate in Odisha, Chhattisgarh and Assam is close to 1%, whereas in Punjab and Telengana, it is much higher than the national average. It must be noted that states such as Telangana (6.4%), Uttar Pradesh (4.5%), Tamil Nadu (4.7%), Punjab (5.2%), Rajasthan (4.5%) and Kerala (5.5%), which are currently undergoing massive Capex cycles in terms of infrastructure development have breached the national average in terms of inflation. This is because a high demand for heavy weight items such as cement, steel, transport and communication along with fuel and light has been putting pressure on prices in above mentioned states. Also it must be understood that most of these states are either wealthier states in terms of consumer's purchasing power or have disbursed significant government money through schemes such as land acquisition (for infrastructure development) and farm loans resolutions - to the public. Recent elections in some of these states is also known to be an inflation instigator. Poorer states such as Assam (1.3%), Bihar (2.6%), Orrisa (1.2%) and West Bengal (2.9%) with lower development in terms of infrastructure investments and lower per capita incomes continue to record lower inflation (national avrgae) as compared to their wealthier counterparts.

The overall inflation for FY17 is pegged at 4.5% as against 4.9% in the previous year. SMERA attributes the lower CPI inflation to the headline inflation, which includes food group and fuel. The headline inflation (non-core) contributes around 46% in the overall inflation. With the healthy growth in agriculture sector and lower crude price, the headline inflation has witnessed a growth of 2.45%. On the other hand, the core inflation (excluding food and fuel) recorded 4.9% in March, 2017. Price level for this category is moving close to 5% in last six months. The lower non-core inflation in FY17 will however have a base effect in next year, which will in turn have a negative impact on next year's numbers. Moreover, price level of core category is also expected to remain high as a stronger economy will help drive up consumption putting pressure on prices. SMERA therefore believes that the inflation rate in FY18 would remain higher than the FY17 numbers. We also expect corporate top lines to improve as inflation, which is a sign of high demand moves up.

Heat map of inflation for major categories:


Heat map of inflation for major states:

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