India preview: Inflation to surprise Reserve Bank with another slowdown

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Figures released Tuesday by the U.S. Labor Department revealed that, on a year-over-year basis, the consumer price index rose 2.2%, a bit ahead of the 2.1% increase reported in January. The CPI was up 2.2% in the 12 months through February, compared with 2.1% in January, while the core index increased 1.8% from a year earlier for a third month.

NEW DELHI:Backed by better than expected performance by the manufacturing and consumer durables sector, India's factory production grew to 7.5 per cent in January over the same month previous year, while retail inflation cooled to 4.44 per cent in February, well within the comfort zone of the government.

"This easing appears to have come largely on the back of a slowdown in the food price inflation on account of one-off seasonal factors", Richa Gupta, senior economist and senior director, Deloitte India said. Economists were expecting to see a 0.2% rise in price pressures. The cost of motor vehicle insurance rose by a record 1.7 percent last month.

In the wake of the Great Recession, 2 percent has been the Fed's target for core inflation. Moreover, core inflation is sticky at around 5 percent, while an imposition of more tariffs on some imports like mobile phones is likely to boost price pressures, giving the RBI more ammunition to wait and watch.

Capital goods, a barometer of investments, showed a sharp increase in output by 14.6 per cent in January 2018, against a decline of 0.6 per cent a year ago.

However, the index for food remained unchanged due to index for food at home compensated the increase in the food away from home index.

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One month ago, reports about an unexpectedly sharp rise in U.S. consumer prices shocked the markets.

In February 2017, however, it was 3.65 per cent.

Average hourly earnings edged up four cents, or 0.1 percent, to $26.75 in February, a slowdown from the 0.3 percent rise in January.

The tighter labour market is driving wages, which should mainly be reflected in higher prices for services.

Fed policy makers have penciled in three rate increases this year, and have been monitoring the inflation picture closely, looking for signs that a tightening labor market and continued economic growth are generating stronger wage and price increases after years of weak inflation. IIP grew at 4.1 per cent in April-January this fiscal compared with 5 per cent in the same period of the previous financial year.

At a seasonally adjusted annual rate, the price index has gained 4.2 per cent so far this year, compared to a gain of only 3.3 per cent at the same point last year. Even at the use based classification the growth is broad based as with the exception of intermediate goods all other segments have shown growth either in high single digit or greater than high single digit.

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