The rise in WPI inflation for April ‘12 to 7.2% was a surprise. Or at least I was caught by surprise given that global food and commodity prices have started to moderate. My sense is that it is likely to be a combination of producer pricing power and data error.
The key commodity indicators i.e. spot copper prices; S&P’s GSCI Index and UBS Bloomberg CMCI Index are on clear downtrend since the beginning of April 12. It is the same case with FAO’s world food index which continues to moderate and fell by nearly 9% during April ‘12 year on year.
So what is causing the rise in inflation? I don’t know yet but I’m planning to dig down deeper on this one to figure out the reason.
However, I will go out on a limb and hypothesize that there are likely to be two reasons for the uptick in inflation:
- Overheating in the economy, made worse by early loosening of RBI monetary policy (to be truthful, that’s benefit of hindsight).It seems that producers still command pricing power as there was an overall price increase after the budget in spite of global commodities prices coming down. This is now being reflected in the WPI inflation number.
- Data error – the data errors and massive revisions in government data has become so common, that it’s very likely that the inflation number can be revised downward next month.
What’s likely to happen in future? Well the global commodity indices have taken a very sharp downtrend in the first two weeks of this month. I would assume that the May ‘12 WPI inflation should come in sharply lower. If not, then the problem could be far more serious.