Crisil core inflation tracker: Fuel prices soften, but metal prices harden

Wholesale Price Index (WPI)-based inflation eased for the third straight month in February, dropping to 2.5 per cent from 2.8 per cent. The gauge is a good 150 bps below its November 2017 peak, and has slid with food (mainly primary food articles) and fuel inflation (mainly mineral oils). 

Contrastingly, manufacturing inflation edged up with metal prices. So far, this financial year (April to February), WPI inflation has averaged 2.9 per cent compared to 1.4 per cent in the corresponding period a year ago. While higher metal and oil prices put upward pressure, falling food inflation capped the upside. Food inflation is 390 bps lower year-on-year at 2.1 per cent, but fuel inflation is up 104 bps to 8.4 per cent and metal inflation 116 bps to 8.5 per cent, which has significantly increased input prices for manufacturers. 

On the other hand, core inflation, which indicates the pricing power of manufacturers because it looks at demand-side pressures on prices, has flat-lined around last fiscal year’s 1.5 per cent for the second consecutive month in February. 

That indicates manufacturers’ ability to pass on higher input prices of metals and fuel stays constrained.

Core inflation has, over time, offered a better perspective of the demand-side impact on inflation in manufactured products. CCII is computed after excluding inflation in basic metals and products from manufactured products, which is subject to high price volatility.

Food inflation could stay under check if the monsoon is again adequate and global food prices stay benign. However, the Budget announcement on minimum support prices (MSPs) can feed food inflation. Also, if global energy prices continue to spiral up and the rupee stays weak, imported inflation can rise. Already, as the pent-up consumption demand returns and the pricing power of manufacturers improves, some upside to inflation is inevitable.

Overall food inflation (food articles plus manufactured food) fell sharply to 0.1 per cent in February, from 1.6 per cent in the previous month. The inflation in food articles fell Rs 210 bps to 0.9 per cent. Inflation in cereals and pulses continued to fall (at -2.4 per cent and -24.5 per cent, respectively). But, the sharp decline came from a 130 bps dip in fruits and vegetables inflation, to 10.6 per cent, and a further slide in inflation in eggs, meat and fish to -0.2 per cent from 0.4 per cent. Inflation in manufactured food articles dipped further into the negative zone for the third month. 

Fuel and power inflation posted a smaller decline in February, at 3.8 per cent from 4.1 per cent. Inflation in coal fell Rs 90 bps, while mineral oils inflation dipped Rs 50 bps, led by a fall in inflation in liquefied petroleum gas, naphtha and bitumen.

Manufactured products’ inflation rose 30 bps on-month to 3 per cent. Splitting this category into two parts gives us the core inflation (measured by CCII) and the base metal inflation. In February, core inflation was unchanged from the previous month, at 1.3 per cent. Base metals inflation (which includes basic metals and fabricated metal products) rose to 12.1 per cent from 10.7 per cent. Global metal prices continued to increase, albeit with a moderation in the pace — prices rose 18.4 per cent 

year-on-year in February, compared with 22.7 per cent in the previous month — but kept the base metal index in WPI up. 

Among other items which pushed up inflation in the manufacturing index were chemicals, textiles, machinery and equipment, and non-metallic mineral products.