Nov headline inflation higher than expected

The Nov 2011 inflation figure has come in at 9.11% as against 9.73% in Oct 2011 and 8.2% in Nov 2010. The figure is much higher than what we had expected. In fact, the markets too had expected the inflation figure to come in below the 9% mark.

While Primary Articles' inflation retreated on a monthly basis, the Fuel & Power and Manufactured Products' inflation increased over last month's figures. The inflation for Primary Articles eased considerably to 8.53% from 11.4% last month, much in line with our estimates. But the inflation for the Fuel & Power group increased from 14.79% to 15.48% due to the higher prices of ATF, naphtha, bitumen and petrol. The inflation for Manufactured Products also increased marginally to 7.7%, as against 7.66% due to an increase in prices of non-metallic minerals and metal products.

Among the Primary Articles, the inflation for non-food articles and food articles eased considerably to 3.22% and 8.54% from 7.71% and 11.06% respectively over the last month. Within the Fuel & Power articles, there wasn’t any considerable change for the individual data.

Within the Manufactured Products group, the inflation for food products and cotton textiles eased to 6.75% and 9.2% in Nov 2011, but that for beverages & tobacco products, basic metal products and non-metallic minerals increased to 13.22%, 13.01% and 6.12% respectively in Nov 2011.

Though the headline inflation showing signs of a cool-off is a development on the positive site, it still continues to hover stubbornly at the 9% levels, which is above the RBI’s comfort zone. The inflation has remained above 9% mark for the last 12 sequential months up to Nov 2011.

However, looking at the current easing trend in inflation numbers over the past one month, we believe that the Dec 2011 inflation data would come below the 8% mark.

Judging by the way the economy has slowed down as of now, with the latest set of dismal industrial output data standing testimony to it and with a cool-off in inflation, we expect the central bank to take a pause in its monetary policy stance expected on Dec 16, 2011 and maintain a dovish approach thereon. As for a cutback in rates, we believe that the RBI should start cutting back interest rates or the CRRs from 2012 onwards.