India's WPI Should Peak in Feburary

Includes: IFN, IIF
by: Wisdomsmith

Wholesale Price Inflation (WPI) rose 8.56 percent for January 2010, continuing its increasing trend. WPI was 7.31 percent for December 2009. The rise was driven by a 17.4 percent jump in food prices, which rose on weak monsoon rains and flooding from last year.

Inflation in manufacturing picked up to 6.55 percent from about 5 percent in December, a sign that inflationary pressures were spreading to other sectors of the economy, reported Reuters.

At Wisdomsmith, we have consistently maintained that reported WPI is lagging on ground inflation. We had written in Oct '09 that we expected WPI to cross 8 percent by March. It already has in January.

WPI has room to grow till 10 percent. Our data suggests on ground inflation was around 10-12 percent in January, higher than the government figure.

Politically, it may not be acceptable to let inflation rise beyond 10 percent, so the government may be tempted to control reported WPI to a shade below 10 percent. We would expect the rise to peter out at about 9.5 percent or so, which may well happen in Feb. WPI could then start coming down from March/April onwards.

Disclosure: No positions