Inflation in Manufactured Products May Intensify

Manufacturing inflation may inch up further as consumption demand gets a fillip from a higher rural demand, 7th Pay Commission payout and the festival season round the corner, says India Ratings and Research (Ind-Ra). With consumption demand showing signs of improvement and commodity price cycle bottoming out, it appears that manufacturers are now raising prices, albeit gently, to test the water. The Wholesale Price Index (WPI) inflation increased to 3.74% in August 2016 from 3.55% in the previous month, because of an increase in manufactured product inflation and to a lesser extent fuel inflation. This is at variance with the moderation in retail price inflation for the same month.

Crop sowing data suggest while pulse prices are likely to soften further, sugarcane and cotton prices may remain firm with an upward bias. However, a third consecutive month of cereal price inflation in excess of 7% after a gap of 24 months, is an early warning that the fight against food inflation is far from over.

Fuel price inflation, which has a weight of 14.9% in WPI, came in at 1.6%, after 13 months of consecutive negative growth. Wholesale food prices, which had been the key driver of WPI, moderated to 8.23% in August from 11.82% in July 2016. Prices of fruits and vegetables declined to 7.0% in August 2016 from 22.3% in the previous month. This, however, was offset by an increase in manufacturing inflation to 2.42% in August from 1.82% in July 2016. Manufacturing inflation has clocked a modest but steady rise since April 2016, led by a price increase in manufactured food products. This suggests manufacturing inflation which had remained down and out due to (i) tepid demand and (ii) lower manufacturing input cost is finally inching up as manufacturers especially in the food products category are gradually passing on cost increases in input costs and/or have begun to exercise the pricing power. Prices of manufactured food products increased to 11.4% in August from 10.2% in July 2016.

Since manufactured products have nearly 65% weight in WPI compared to 14.3% for food articles, an accentuation of the price increase trend witnessed in the manufacturing inflation, since the beginning of this fiscal, is likely to push WPI inflation further. However, sustainability of this gradual increase in the prices of manufactured items would depend on the future consumption demand.

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