Core inflation: Rising once again

Wholesale Price Index (WPI)-based inflation rose to six per cent in May from 5.2 per cent in April. The increase in inflation was broad-based, with food, fuel and manufacturing inflation trending upwards.

A faster price rise in fruit and eggs, as well as fish and meat pushed up food inflation to 9.5 per cent in May from 8.6 per cent in the previous month. Fuel inflation rose to 10.5 per cent as rising oil prices, driven by tensions in Iraq, drove up petrol inflation to 12.3 per cent - a 28-month high.

Non-food manufacturing inflation - the Reserve Bank of India (RBI)'s measure of core inflation - also jumped to 3.8 per cent in May from 3.4 per cent in April. Core inflation captures demand-side pressures on prices and tends to remain low in a slowing economy. However, despite weak growth, price pressures were seen building up across several manufacturing categories such as chemicals, wood products and beverages & tobacco. Rising metal prices also contributed to the higher core inflation in May. Ferrous and non-ferrous metals inflation rose to two per cent in May from 0.7 per cent in April.

CRISIL Core Inflation Indicator (CCII), an alternative measure of core inflation, also rose to 3.8 per cent in May, albeit from a higher 3.6 per cent in April. The smaller rise in the CCII was due to the fact that the CCII removes metals from manufactured articles while measuring domestic demand pressures on prices. This is because metal prices are mostly determined by changing global demand-supply dynamics, and volatility in exchange rate rather than domestic conditions alone.

Manufactured or processed food prices are included in the CCII, as price changes in this category reflect second-round impact of inflation in primary food articles and, therefore, capture domestic demand-side pressures in the economy. As primary food inflation has stayed high at 8-9 per cent, manufacturers are passing on some of the cost rise to consumers, despite weak demand. This is reflected in a rising inflation in manufactured food articles to 2.2 per cent in May from two per cent in April. Rising price pressures in manufactured food are rightly captured in the CCII.

Any pick-up in non-food manufacturing inflation or the RBI's measure of core inflation is likely to be limited. However, a sub-normal monsoon could push up food prices and feed into higher inflation for manufactured or processed food articles. This may drive up core inflation, as measured by the CCII.