WPI based inflation declined to 5.4% in June 2014 from 6.0% in May 2014. India Ratings believes that this could be a temporary blip as the delayed monsoon and the consequent spurt in vegetables prices points to the likelihood of inflation aggravating in a pattern similar to that of last year.
Headline Inflation Eases: Wholesale Price Index (WPI) based inflation declined to 5.4% in June 2014 from 6.0% in May 2014. India Ratings & Research (Ind-Ra) believes that this could be a temporary blip as the delayed monsoon and the consequent spurt in vegetables prices points to the likelihood of inflation aggravating in a pattern similar to that of last year. In 2013 inflation had dipped to 4.6% in May and later gradually increased and peaked at 7.5% in November.
Food Inflation Still at Elevated Levels: Inflation in primary food articles came in at 8.1% in June 2014 (May 2014: 9.5%) mainly due to a decline in vegetable prices. However the prices of certain vegetables have soared lately and this will likely exert pressure on inflation in the coming months. Moreover, inflation in many food items such as fruits, milk, egg, meat and fish, condiments and spices and coffee among others, continues to be in double digits. The contribution of fruits and egg as well as meat and fish to the headline inflation was 8.9% and 4.9% respectively in June 2014.
Structural Factors Unresolved: A glance at the WPI basket of food articles suggests that the sustained high food inflation is a mix of both structural and seasonal factors. While seasonal factors could swing headline inflation in either direction, inflation in other food items has consistently remained high. Over FY10-FY14, the average yearly inflation for rice was 10.1% (June 2014: 10.3%), milk 12.5% (10.8%), eggs, meat & fish 17.2% (10.3%) and pulses 8.5% (1.8%). Ind-Ra believes inflation in these items will remain elevated unless structural factors including low productivity and bottlenecks in the agricultural supply chain are addressed.
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