By Ruma Dubey

One month of an inflation number below 7%, a 32-month low, does not mean anything at all; it does not in any way mean that RBI will lower its guard and start reducing rates. Just a month of a lower-than-expected number should be looked with trepidation rather than any reason to celebrate as it means falling growth is affecting demand which in turn is affecting inflation.  We all know that this number does not contain updated data when it comes to fuel and the basket of products contains a lot of products which are outdated. Food prices have come down MoM and that too comes as a shocker given the fact that we all are actually paying much more than what we did earlier. Clearly, the food basket has items which do have not much relevance.

A quick look at the WPI July numbers (MoM):

• Core inflation at 6.87% v/s 7.25%
• Primary articles at 10.39% 10.46%
• Manufacturing products inflation at 5.58% v/s 5%
• Food articles at 10.06% v/s 10
• Non food articles at 13.05% v/s 6.85%
• Fuel and power at 5.98% 10.27%

The rise in manufacturing products inflation is worrisome as it indicates that demand is slowing down, the power to purchase is down. It also shows that companies are grappling under high costs but are unable to pass it on to the consumers as demand is already taking a beating. Thus companies are facing a double whammy – low demand and high manufacturing cost.

One had expected food prices to rise but it came down and one was left scrutinizing the numbers, trying to understand, what exactly fell. Well, it was the 5.6% drop in vegetable prices which kept a leash on the overall food price index. MoM, it is up but it is marginal and that comes as a surprise.  But one has to remember that this is a transient number, with a drought like situation in the country, clearly, food prices will only go up further. Food inflation will have a ride on a hot air balloon. More is the fuel added, the more will the balloon soar high. RBI is like the wind, it is trying its level best to blow hard and squelch down the burning fire and pull the balloon down. Unfortunately, the wind is stoking up the fire further, making visibility ahead very blurred.

Fuel and power costs are down. One cannot help but feel baffled as one continues to pay much more than earlier. This is again on account of outdated data. The electricity prices, which have gone up, have not been updated over the past 8 months and thus the resultant number of inflation which we are getting is based on old prices.  Naptha and furnace oil prices have been cut and that is also probably what has brought in this baffling fall in fuel prices. There was also a fuel price cut and that is what has got reflected in the fuel basket. Again, all these prices, which had been cut, are sure to be rolled back and that surely means what we see today is merely a blip.

Undoubtedly, there is cause for worry. On one hand, drought could stoke food inflation further but demand is also showing signs of petering out as auto companies have already started cutting down production to prevent pile up of inventory. So falling demand, higher costs thus growth can only slow down further.

Indian inflation remains the fastest in the BRIC group and the weakest monsoon rains in three years threatens to further aggravate the falling growth situation as rural income is sure to take a hit and food prices will go up. Govt spending continues unabated and with pressure mounting to hike fuel prices to cut subsidies and bring down fiscal deficit, inflation is looking at an upward surge. Falling demand should ideally lower inflation but the food prices, will keep this rate high.

RBI is not going to cut rates in a hurry any time now. Maybe if Chidambaram helps fuel demand, maybe then we could see growth show some comeback. Or else, we can sit back and watch the dance of inflation and growth while our savings dwindle.

CPI numbers are scheduled for 21st August and that could give us the expected, unpleasant surprise.