Consumer inflation inched up to 5% in December 2014 year-on-year, against previous month's inflation of 4.4% YoY. The item-wise break-down is as below:
As seen in the above "Item-wise contribution" table, the contribution from food inflation is up by 0.7%, which is reflected in a lower headline inflation number. Food, constituting ~50% of the consumer basket, is the key item that influences the headline inflation. We also note that housing expenses have been running at close to 8% inflation levels since the beginning of current CPI series.
Core-inflation (inflation excluding food & fuel) continued to trend downwards, inched down marginally to 5.2% YoY, against 5.5% YoY in the previous month. This shows the real underlying downward trend of inflation. Current month's core inflation is the lowest since the beginning of the current CPI series.
Cereals, the most important item in the food category (with 14.6% weight in the index), is at the lowest level in 32 months. But milk, having 7.7% weight in the index, still rules at inflation close to 10%, with prices rising ~11% CAGR since Jan'2011.
Wearing-off of base effect had a significant influence on the higher inflation figures during the month. In 2013, the index peaked in November, and thereafter retreated before breaching the Nov'2013 levels in May'2014. CPI build-up over the financial year has lagged behind previous financial years, due to this high base effect.
Data regarding wholesale prices also confirmed the slowing inflation rates. Wholesale prices rose just 0.1% YoY in Dec'2014, after remaining flat in Nov'2014 (the lowest since Jul'2009). Core inflation went down further to 1.6% YoY, the lowest since Dec'2009.
Source: Office of the Economic Adviser
Our View: Inflation to be within central bank target; Expect additional 25bps rate cut in March 2015
Data regarding both consumer and wholesale prices indicated disinflationary trend in prices. We believe that this trend is likely to continue for some time. The higher inflation figures for Dec'2014 was expected by the central bank. Further data which confirms continuing disinflationary pressures, has been stated by the central bank as one of the factors to further ease the policy rates. We also would like to point out that, the recent data regarding rural wages showed that wages rose at ~3% YoY in Nov'2014, which could reduce inflationary pressures in rural areas.
With inflation well within the target 8%, we expect a further 25bps cut in policy rates in March 2015, after the budget. Beyond that, if commodities prices remain at the current levels and crop production is normal (along with normal monsoon in Q3CY2015), we could see further rate cuts in the second half of CY2015.
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