Jay Shankar, Chief Economist, Religare Capital Markets, said, "Our estimate of headline WPI inflation for June is 9.6% as against a consensus estimate of 9.7% YoY. Food inflation (wt of 14.3% in WPI) would have increased by 8.5% YoY in June. Prices of primary articles (wt 20.1%), that includes food articles, non-food articles and minerals, are likely to have grown by 12.2% YoY during the month. Manufactured products inflation (wt 65% in WPI) is likely to hit a 33-month high of 7.7% YoY. Core inflation (non-food manufacturing, wt 55%) is also likely to stay above 7% as in three of the last four months. The contribution of manufacturing to the headline inflation is likely to remain high at 47% as compared to a 2-year average of 37%."

Based on the weekly data available, the inflation for primary articles increased to 12.2% in June from 11.3% in May 2011, while snapping moderation for last four sequential months by 714 bps. The increase in the inflation for primary articles was mainly driven by sharp fall in inflation for minerals (from 11.9% to 27.0%). Meanwhile, the inflation for food articles was steady at 8.7% and that for non-food articles eased to 18.6% in June 2011 from 22.4% in May 2011.

Within food articles group, the inflation for food grains, condiment & spices, fruits and vegetables eased to 1.6%, 10.3%, 26.4% and -7.6%, respectively during June 2011. However, the inflation for milk, ‘egg, meat & fish' and other food articles galloped to 12.5%, 9.6% and 17.9%, respectively. Among vegetables, inflation for ginger (-38.1%), brinjal (-17.3), okra (28.0%) and cabbage (29.2%) eased, while among fruits inflation for mango (24.6%), lemon (75.6%), apple (0.0%), banana (15.3%) eased during June 2011. The inflation for milk doubled to 12.5% in June 2011 from 6.4% in May and 4.7% in April 2011. The inflation for fish-marine and mutton increased to 11.5% and 5.5%, while that for poultry chicken eased to -5.0% in June 2011. Among, the spices, inflation for turmeric, cardamom and black pepper was negative at -34.4%, -16.1% and -19.3% during June 2011.

The inflation for non-food articles, in primary articles group, dipped to 18.6% in June 2011 from 22.4% in May 2011, driven by sharp fall in inflation for raw cotton from 68.4% in May 2011 to 51.3% in June 2011. However, the inflation for oilseeds, led by high inflation for groundnut, rapeseed and soyabean, increased from 12.2% to 13.2% in June 2011. Further, inflation for raw rubber and timber eased to 31.9% and 17.2%, while that for flowers also eased to -10.6%.

The inflation for minerals group, under primary articles group, surged to 27.0% in June 2011 from 11.9% in May 2011. Within the minerals group, the inflation for crude petroleum spurted from 1.9% in April to 10.8% in May 2011 and zoomed to 47.3% in June 2011 exerting heavy pressure on inflation. However, inflation for iron ore declined from 19.3% to 13.3% in June 2011.

The inflation for fuel and power group rose slightly to 12.8% in June 2011 from 12.3% in May 2011. Within the group, the inflation for coal and electricity was steady at 13.3% and 1.3%, while that for mineral oils increased to 16.8% in June 2011. Among the mineral oils, the inflation for petrol, diesel and LPG increased to 30.6%, 6.6% and 12.2% during June 2011.

The contribution of primary articles to the overall inflation has increased to 309 bps in June 2011 from 282 bps in May 2011. Meanwhile, the contribution of fuel product group has also galloped to 196 bps in June 2011 from 189 bps in May 2011.

Inflation for April 2011 to be revised upwards

The Ministry of Commerce has been revising provisional inflation figures sharply upwards for past many months. However, the inflation for April 2011, with new 2004-05 base, is also likely to be revised upwards above 9.4% compared to 8.7% reported earlier. As per the weekly revised data available, the inflation for fuel products was revised downward to 13.0% for April 2011, but that for primary article was revised sharply upwards to 15.1% from provisional figures of 13.3% and 12.1%.

Outlook

The hike in petrol, diesel, kerosene, domestic LPG in the past couple of months has added to inflation concerns. Though there are signs of easing of many agri commodity prices including edible oils, and crude oil and derivatives, including polymers, this trend appears to be short term, and they have shown signs of rebound of late.

India's IIP growth has been decelerating from 8.9% in March 2011 to 5.8% in April 2011, which further eased to 5.6% in May 2011, partly due to high inflation lead spike in interest rate regime. This has affected very many rate sensitive sectors like banks, real estate and construction etc. Still, so long as inflation remains exceptionally high, RBI has no room to shift away from tight money policy.