India Insight:Higher food prices pull retail inflation up

What is in the details

    Headline inflation picks up to 5.4% YoY in Jun-15: This was above our andthe market’s expectation of 5.1% and compares with the 5% registered inMay-15. Core inflation also continued to accelerate, reaching 5% YoY (vs4.7% YoY in May-15). This pick-up in the month of June was largely driven byhigher food prices and an increase in services inflation.

    Food inflation accelerates to 5.7% YoY (vs 5.1% YoY in May-15): Thepick-up was largely led by higher prices of pulses, meat & fish, vegetables, oil& fats and eggs. We believe a part of this increase in food prices is largelyseasonal and expect the trend to normalise over the next two to three months.The rise in the pulses price was expected, as India is both the largestconsumer and producer of pulses in the world, and weak production in FY15could have resulted in pushing global and domestic prices higher.

    Core CPI inflation (CPI ex food and ex fuel inflation) picked up to 5% YoYin Jun-15 compared with 4.7%YoY in the previous month. However, we notethat two major energy components, mainly petrol and diesel, are part oftransport and communication, which cannot be further segregated. This limitsthe estimation of CPI core inflation based on statistical techniques other thanexclusion. The acceleration in core inflation was largely driven by higherprices of miscellaneous items (4.2% YoY vs 3.8% YoY in May-15) andclothing & footwear (6.3% YoY vs 6% YoY in May-15). The higher service taxrate of 14% (vs 12.36% earlier) would have contributed to pushing the coreinflation higher, in our view.

    Outlook

    Base case