CPI at 7.65% for Jan 2012

On Feb 21, 2012, the govt. released the Consumer Price Index (CPI) for the month of Jan 2012, which stood at 7.65 per cent when compared to the same month last year. This is the first time that we are comparing the CPI on a YoY basis. The CPI inflation is higher by 110 bps when compared to the Wholesale Price Index (WPI) which stands at 6.55 per cent for the month of January 2012. CPI is broader way of gauging inflation and will further help the RBI in reviewing its monetary policy.

Till now the RBI use to check the WPI and review its monetary decisions. The ground reality for gauging inflation considering WPI does not seem appropriate. The RBI says that inflation has cooled off but this is not to be witnessed when an individual goes to the market to buy any product or item. The CPI will further reflect the changes of prices in the items at the retail level through which a common man gets affected. The following is the comparison of the movement of WPI and CPI rate of change on a month-on-month basis:

From the above graph we can clearly see that there is no change in the rate of inflation when we compare WPI and CPI. From April to May 2011 when WPI showed a decline in trend, CPI increased substantially.

CPI is classified into five groups which are food, beverages & tobacco, fuel & light, clothing bedding & footwear, housing and miscellaneous. The CPI will now be a better gauge for inflation than the WPI as it also includes services like education, transport, etc. There is news that CPI will replace WPI soon, but we believe this will not be in the near future. The government has to provide sufficient time and see to it whether the data has been properly collected and is helpful in taking monetary decisions.

In January 2012 the CPI for rural and urban inflation stood at 7.38 and 8.25 per cent which further indicates that the cost of living is higher in the urban as compared to the rural areas. The vegetable prices saw a decline of 24 per cent on a YoY basis. On the other hand, milk and milk products saw a rise of 16.53 per cent while clothing, bedding, footwear and fuel & light stood at 13.13 and 14.25 per cent respectively.  The next date of release of the CPI for the month of February is on March 19, 2012.

Now the question arises as to what will the RBI do in its next move? The RBI earlier has guided that the projected WPI inflation for FY12 is 7 per cent. But now will it keep the level same for the CPI or will the projected level for CPI be lower? One has to watch out for the RBI’s monetary policy review which is scheduled for March 15, 2012. The RBI will provide guidance on CPI, on interest rate reversal and the overall economic environment which will further provide cues for the markets.

We anticipate the RBI to initiate reversal in the interest rate cycle at its policy review. The central bank may again cut back the CRR or may cut the repo rates, which would really help to infuse fresh impetus in the market sentiments.