Consumer price inflation set to see upside pressure: Crisil

Even as consumer price inflation (CPI) has come down due to a dip in food inflation and Index of Industrial Production (IIP) also seen a slip as a fallout of demonetisation, the former could see upside pressure hereon, Crisil said today.
CPI inflation could see upside pressures hereon as some benefits from a high-base effect will begin to wear out and as the imported component of inflation nudges up, the rating agency said in a report.
CPI softened 20 basis points to 3.2 per cent in January from 3.4 per cent in December, primarily because of a 70 bps drop in food inflation. IIP fell by 0.4 per cent on- year in December on the back of 2 per cent contraction in manufacturing sector.

The fuel component of CPI rose afresh on rising crude oil prices and weaker rupee. Meanwhile, the persistent stickiness in core inflation is contrary to the refrain that demonetisation had materially dented core demand. Core inflation (CPI excluding food) rose to 5.1 per cent in January from 5 per cent in December, the report said.
For the fiscal so far (April to January), overall CPI at 4.7 per cent is 20 bps lower than in the comparable previous period, while food inflation is down 11 bps to 4.7 per cent, and core inflation unchanged at 4.9 per cent.
While IIP, as per the report, had failed to capture the impact of demonetisation in November owing to base effect, the latest number does so.

That said, mining and electricity sectors managed to display healthy growth of 5.2 per cent and 6.3 per cent, respectively. When viewed from the user-based classification, the biggest negative contribution to IIP growth came from the consumer goods segment, the rating outfit maintained.

The Monetary Policy Committee (MPC) review of February 8 reiterated its medium-term inflation target of 4 per cent. Given the inflationary pressures in the economy, policy space now remains constricted, it said, adding the repo rate was accordingly left unchanged at 6.25 per cent, and the monetary policy stance was shifted from 'accommodative' to 'neutral'.
Crisil also expects CPI inflation to inch up to 5 per

cent in FY18, from an estimated 4.7 per cent in fiscal 2017.
As per the report, this will be driven by two reasons. First, rising global oil and commodity prices amid geopolitical tensions and a weaker rupee that can drive up imported inflation.
Secondly, core inflation (non-food, non-fuel), which, despite seeing a small demonetisation-led decline, remains firm and could rise as demand picks up mildly in fiscal 2018. However, a prudent Union Budget does cap the upside pressures that a populist one could have had on inflation, it said.
While the IIP had failed to capture the impact of demonetisation in November owing to base effect, the latest number does so, the report said.

The decline in IIP was limited owing to a weak base of last year. That said, mining and electricity sectors managed to display healthy growth of 5.2 per cent and 6.3 per cent, respectively.
When viewed from the user-based classification, the report said, the biggest negative contribution to IIP growth came from the consumer goods segment.