The government’s diesel price raise has pushed wholesale price index-based inflation to a 10-month high of 7.81 per cent in September, from 7.55 per cent in the previous month, strengthening a feeling that the Reserve Bank might not change policy rates in its monetary policy review later this month.
Economists said they believed inflation would rise to eight per cent in the next three months.
The inflation rise is despite that in food items, especially in the generally worrisome protein-based products, coming down in September.
However, fuel and power inflation again came back to double digits in September, after remaining in single digit for two months. Inflation in this category rose to 11.88 per cent from 8.32 per cent in August and 8.39 per cent in July. The government had raised diesel by Rs 5 a litre from the middle of September, so only part of the impact came on the September inflation. The full direct impact and resulting cascade on prices would start coming from October, though the pricing power of manufacturers will also matter a lot in a scenario of low demand in the economy.
The rate of price rise in diesel was 8.94 per cent in September against 0.36 per cent in August and zero per cent in July. However, inflation in diesel had been as high as 9.24 per cent in the first two months of this financial year, April and May.
The government had also capped subsidised cooking gas (LPG) cylinder sale to six a year for a family. In some states, this has been raised to nine. It is too early to gauge the impact but LPG inflation rose to 1.09 per cent in September against 0.61 per cent in August and 0.68 per cent in July. Yet, inflation in this item was as high as 11-15 per cent for the previous three months --April, May and June.
Inflation in manufactured items also rose to 6.24 per cent in September, the highest in this financial year, from 6.14 per cent in the previous month. Part of it came through higher processed food prices, as inflation here rose to 9.76 per cent in September from 9.01 per cent, due to a spurt in the prices of sugar and edible oils.
Aditi Nayar of Icra said the second round impact of the diesel price rise on the prices of manufactured products might be partly offset by the stronger rupee this month.
Even then, she felt,"headline inflation is expected to exceed eight per cent in the third quarter of 2012-13”.
Core inflation (rate of price rise in non-food manufactured items), a key parameter for RBI to decide on its monetary stance, remained intact at 5.6 per cent in September. A CRISIL research report attributed persistently high core inflation over the past few months to a partial pass-through of higher imported input costs to improve profit margins, rather than rising demand-side pressures in the economy.
Among primary food items (non-processed ones), inflation in protein-based items such as pulses, milk, eggs, meat and fish declined in September versus August. However, inflation rose in rice, wheat and fruits.
The rate of price rise in onions continued to be negative at 24.88 per cent in September, meaning these prices declined compared with the same month last year.
Movement in wholesale price inflation in September was divergent from that of consumer price inflation. Retail price inflation declined to a six-month low of 9.73 per cent from 10.03 per cent in August. This could partly be attributed to higher weightage of food items in consumer price inflation than the wholesale-price one.
Also, said economists, the diesel price rise was probably not factored into retail price inflation. Fuel and lighting inflation, rather, declined to 7.29 per cent from 7.55 per cent in August. Besides, certain items like the housing index do not figure in the wholesale price index, they added.
Even when inflation declined on a consumer price basis in September, economists generally felt RBI would not lower the repo rate (at which banks borrow from the central bank). Now, with this movement in wholesale price inflation, this view has been strengthened, that RBI would retain the repo rate and rely on other moves such as open market operations and the cash reserve ratio.
There is no guarantee that the final figures of inflation for September would remain at 7.81 per cent . This is so because the numbers are being revised upwards. Inflation for July has been revised to 7.52 per cent as compared to the 6.87 per cent estimated earlier.
The index of industrial production grew 2.7 per cent in August after two months of decline.