Inflation for December 2011 has come in at a 7.47%, miserably low compared to 9%+ figures we have been seeing lately. But the downside is that prices haven’t actually fallen, they have at only been flat compared to November/October.

Worse, revisions are still going up, with the October 2011 figure, first announced at 9.73% raised back up to 9.87%. That means even this December figure may be revised up. In November 2010, Inflation was first announced at 7.48%, only to be revised up to 8.20% later.

Lastly, let’s look at the components:

Primary articles inflation is now just 3%, but the rest of the components account for 80% of the index, and are looking dangerous. Fuel inflation is still near 15% – and this is with the crude price hike not being passed on through diesel.

Manufactured goods is still at 7.41%, which is strange because the falling rupee should have impacted that by now. Much of Indian secondary goods are impacted by the dollar as their input is eventually a commodity traded internationally (Rubber for tyres, metals for cars etc.). There are only two reasons that prices haven’t gone up, officially:

a) Companies are using their inventory to exhaust current supplies of input products, and therefore not increasing prices. This will lead to an eventual increase anyhow as they exhaust their input pipelines, and have to secure new supplies at higher prices.

b) There is no proper reporting – that prices have gone up, but the WPI is just not reporting them. This is a more likely cause, as I have seen. The price of Coke (not the drink, the fuel) has not been updated since March 2011, and coking coal is unchanged since Feb 2011. In the real market, the prices are up substantially, but the WPI guys use the rate contracts at Coal India which haven’t changed due to political pressure (after all there is a shortage of coal of all sorts, prices MUST go up). International prices of coal have gone up. That means we will eventually see a big price increase when the price update actually happens, so your 9% numbers are likely to come back.

Finally, with a long period of inflation, we actually need to see much lower numbers. The next two months – Jan and Feb – will likely show high headline inflation figures (many rates go up in Jan, like Milk).

In terms of RBI action, I expect them to not raise rates, but not cut them either. Growth continues to be strong, and inflation needs to show stability before the RBI can reverse policy.

Inflation at the Primary Articles Level is now at the lowest since 2005. (I couldn’t get the earlier data since it’s in a different base year)

This was the time onion prices spiked last year, and so did primary articles inflation.

Continuing on, primary articles won’t make too much of a difference to us; the inflation will have moved to fuel and manufactured goods, where the impact of the 20% drop in the rupee will hit first.

For the week ended 3 December 2011, Primary Articles Inflation contracted to 5.48%. This is largely food and a good crop has made prices come down.

I believe we will see inflation go temporarily negative at this rate, though the rise of the dollar will percolate into the system and raise prices very soon.

In a shocking development – not really – Monthly inflation for the month of November has come in at 9.11%.

As for the components, notice that slowly the primary articles piece is coming down, but the rest – Fuel and Manufactured goods, continue to inch up:

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Fuel’s up due to the revision in prices of petrol and the hike in ATF and related fuel. Of course the prices of coking coal and coke are still not revised, distorting the real impact.

The troubling issue is that this data is preliminary. Data is revised two months later. For September, whose revised data was presented today, the original figure shown was 9.72%, which is now revised to – hold your breath – 10%.

In a significant note, the revision of Manufactured Goods takes it to 8%, the highest since September 2008.

This will weigh on RBI’s decision to raise or not. The rupee, at 53.8, will now cause inflation in fuel and manufactured goods, while the winter crop dampens the prices of agri-commodities.

For the week ended 26 Nov 2011, Primary Articles Inflation has dropped to 6.92%, the lowest since July 2009.

As you can see it’s not just the rising “base” figure of last year, but the trend in the graph points downwards.

Unfortunately since much of the data is not updated in time – some data is left unchanged for three years! – I would not be too gung ho just yet. The consumer basket, measured by the CPI(IW) and CPI (Urban), is still in double digits.

Primary Articles Inflation has fallen to 7.74% for the week ended 19 Nov 2011. This is the lowest since July 2009.

There is both a high base effect and a lowering of prices that’s working in favour of bringing down inflation.

But of course:

• Coal prices – Coking, non-Coking etc. – have not been updated since Feb 11. Prices have gone up substantially since; this is not part of primary articles,though.
• According to the index, tomato prices are up 71% in the last year. I don’t think they are as popular as onions, otherwise some TV channel would have thrown a fit by now.
• It’s winter, and with a great monsoon, expect prices to come down substantially. For the next three months, there shouldn’t be more than 7% headline inflation in the WPI. We’ll probably resume with inflation in Feb next year.

For the week ended 5 Nov, Primary Articles Inflation has come in at 10.39%, the lowest level since October 2009. This is good, in a way, and this is not even seeing too much of a base effect.

The WPI isn’t too useful for a consumer basket but it’s what we use to work our GDP numbers and interest rates. Encouraging though, but still sticking to the trendline; let’s wait and watch.

October Monthly Inflation – the more comprehensive Inflation report – comes in at 9.73%, which seems to be quite high as a headline number.

Component wise, Fuel is up the most:

While Manufactured goods is the seriously large component (65% weight) it seems to have reduced a bit in the index. This might be the RBI measures working, or it may simply be a phase before the rise resumes.

Meanwhile the new 10 year yield went to 8.96%, while the earlier 10 year bonds were around 9.04%: there was no big move. The BankNifty Index opened up nearly 1.5% but ended in the red, down 0.4% at 9256.

Quick note about Primary Articles Inflation on the week ended 22 Oct: Up 12% from last year:

I’d mentioned last week that the headline numbers will look bad till mid December, because of a flattenned level last year. The inflationary trend (recent slope) has not gone down. jay Shah is right – we need to have a seasonally adjusted index and take recent trends rather than compare against a jittery base last year.

But of course, our finance minister blames it on the festive season. Forget base effects – the current inflation slope is still bad. I wonder whether the government really gives a damn anymore.

Primary Articles Inflation was at 11.75% for the week ended 15 October 2011, up from last week’s 11.18%. This is expected, to a certain extent as the index levelled off here last year. The lower base is in existence till November 5.

Interestingly, the number for 20 August was revised DOWN by 0.39% from 12.93% down to 12.54%.

This number is still too high. At this rate of move, we’ll still be above 8% in December, and remember that the current level is already 10% higher than March end 2011.  (the index had a local peak in Jan)