Crisil's Core inflation Tracker: Signs of an uptick in core inflation?

Wholesale Price Index-based inflation (WPI) fell to an eight-month low of 5.05 per cent in January. This was led by a sharp decline in vegetables inflation to 16.6 per cent in January from 57.3 per cent in the previous month. Similar was the case with CPI inflation, which fell to 8.8 per cent in January-an over 100-basis-point decline over the previous month.

Non-food manufacturing inflation, the Reserve Bank of India's (RBI) measure of demand-side pressure on inflation, rose to 3.0 per cent in January from 2.8 per cent last month due to an increase in inflation of basic metals, textiles, leather and wood products. In January, basic metal prices rose by 0.4 per cent y-o-y after falling for nine consecutive months. CRISIL's Core inflation Indicator (CCII), an alternative measure for core inflation, however, remained largely stable at 3.1 per cent in January.

Unlike non-food manufacturing inflation, the CCII excludes metals and includes manufactured food articles. This is because metal prices are largely influenced by changing global demand-supply dynamics, and volatility in exchange rate, rather than domestic demand. Manufactured or processed food prices, in contrast, reflect second-round impact of inflation in primary food articles, and therefore capture domestic demand-side pressures in the economy.

With primary food inflation on a decline - 8.8 per cent in January from an average 18 per cent in the previous five months - manufacturers, it appears, are beginning to pass on the cost benefit to consumers due to weak demand conditions.

As a result, manufactured food inflation continues to fall-it was 1.5 per cent in January, down from 1.8 per cent last month. However, lower inflation in manufactured food was offset by a pick-up in inflation of non-food manufactured categories such as textiles and the CCII remained largely stable. Textiles inflation rose to 6.6 per cent in January from 5.8 per cent in December.

Going ahead, an increase in metal prices driven by global recovery and an uptick in inflation in other manufactured products is likely to push up non-food manufacturing inflation. CSO's advance estimates suggests that private consumption growth has picked up in the second half of 2014-15, on the back of higher farm incomes. However, the pick-up will be limited as demand conditions remain relatively weak. The upside to CCII however, may be lesser as it excludes metals.