The inflation for primary articles and fuel & power group eased to 11.3% and 12.3% in May 2011 from 12.0% and 13.3% in April 2011, but the inflation for manufactured products increased to 7.3% in May 2011 from 6.2% in April 2011. However, the inflation reading for March 2011 has been revised sharply upward to 9.68% from 9.04% reported earlier.

The rise in wholesale price index during May 2011 at 9.06% was ahead of market expectations. As per Capital Market's poll of economist, the WPI inflation for May 2011 was expected to remain steady at 8.7%. The economists responding to the poll had projected the inflation in the range of 8.3% to 9.1% for May 2011. The median of the economists forecast's for inflation for April 2011 stood at 8.7%.

The inflation for primary articles has eased to 11.3% in May 2011 from 12.06% in April 2011. The fall in the inflation for primary articles was mainly driven by sharp fall in inflation for non-food articles (from 27.3% to 22.3%) and food articles (from 8.7% to 8.4%), while the inflation for mineral rose to 11.9% from 7.4% in April 2011.

Within food articles group, the inflation for vegetables turned negative at -1.6%% in May 2011 from 2.3% in April 2011, but the inflation for fruits galloped to 31.9% from 28.9%. Among vegetables, inflation for tapioca (6.0%), brinjal (-17.1) and cabbage (-8.7%) eased, while among fruits inflation for banana (19.6%), apple (32.0%), orange (34.2%), papaya (46.7%) increased during May 2011. The inflation for cereals rose to 5.1%, while that for pulses further declined to -9.2% during May 2011. Inflation for fish marine and poultry chicken eased sharply to 4.0% and -0.5%, but inflation for milk increased to 6.4%. Among, the spices, inflation for turmeric declined to -20.1%, while that for chillies and black pepper increased to 36.4% and 78.6% during May 2011.

The inflation for non-food articles, in primary articles group, dipped from 27.3% in April 2011 to 22.3% in May 2011, driven by sharp fall in inflation for raw cotton to 68.4% in May 2011 from 101.2% in April 2011. However, the inflation for oilseeds, led by high inflation for groundnut, rape seed, copra and soyabean, increased to 12.2% from 10.0% in April 2011. Further, inflation for raw rubber and timber eased to 40.7% and 47.5%, but that for flowers increased to -7.7%.

The inflation for minerals group, under primary articles group, surged from 7.4% in April 2011 to 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. However, inflation for iron ore declined to 19.4%, but that for manganese ore increased to -37.7% in May 2011.

The inflation for fuel and power group eased from 13.3% in April 2011 to 12.3% in May 2011. Within the group, the inflation for coal declined to 13.3% in May 2011, while the inflation for electricity tumbled to -1.3% on high base. Among the mineral oils, the inflation for petrol surged to 27.3% during May 201, due to petrol price hike in mid-May 2011, from 21.8% in April 2011.

The inflation for manufactured product increased from 6.2% in April 2011 to 7.3% in March 2011. Within Manufactured group, the inflation for food products increased to 7.3% in May 2011, led by rise in inflation for sugar (from 3.3% to 5.3%), edible oils (12.9% to 15.5%) and tea leaf (6.0% to 15.2%). Meanwhile, the inflation for ‘textiles' (15.9%) and ‘basic metal products' (7.9%), ‘chemical and chemical products' (7.1%) and ‘Transport, equipment & parts' (4.0%) also increased during May 2011. However, the inflation for ‘leather products' (-1.4%) and ‘rubber & plastic products' (8.7%) eased during May 2011.

The contribution of primary articles to the overall inflation eased from 299 bps in April 2011 to 282 bps in May 2011. The contribution of fuel product group also eased to 189 bps from 202 bps in April 2011, but that of manufactured products jumped from 370 bps in April 2011 to 434 bps in May 2011. The contribution of food item (food articles and food products) rose from 208 bps in April 2011 to 220 bps in May 2011, while that of non-food items (all commodities excluding food items) increased from 663 bps in April 2011 to 682 bps in May 2011.

The Ministry of Commerce has continued to revise provisional inflation data upwards. The upward revision in March 2011 data (base 2004-05:100) was made with higher revised inflation for primary articles and manufactured products at 13.44% and 7.45% compared to 12.93% and 6.50% reported earlier. Meanwhile, the inflation for fuel and power group was revised downwards to 12.49% for March 2011 from 12.92% reported earlier. The overall inflation for March 2011 has been scaled up to 9.68% from 9.04% reported earlier.

During May 2011, WPI based inflation rate stood at 9.06%, of that 282 bps came from primary articles, followed by 434 bps from the manufactured products group and 189 bps from fuel products group. WPI based inflation for May 2011 was 40 bps higher at 9.06% compared to 8.66% reading in April 2011.

The contribution of fuel and power group dipped to 189 bps in May 2011 from 202 bps during April 2011. Within the fuel products group, the contribution of mineral oils increased from 154 bps in April to 160 bps in May 2011, while that of coal and electricity declined to 33 bps and -4 bps during May 2010 from at 39 bps and 10 bps in April 2010. Within the mineral oils group, the inflation for petrol increased to 27.3% during May 2011 due to Rs 5 per liter hike announced in mid-May 2011.

The contribution of manufactured products to overall inflation increased to 434 bps in May 2011 from 370 bps in April 2011. Within manufactured products, the contribution of ‘food products' surged to 72 bps from 56 bps. However, the contribution of ‘chemical and chemical products', textiles ‘textiles', and ‘basic metal alloys & metal products' groups moved up to 75 bps, 97 bps and 85 bps, respectively. Meanwhile, the contribution of ‘transport, equipment & parts' and ‘machinery and machine tools' group also rose to 18 bps and 24 bps during May 2011.

The contribution of foods item (food articles and food products) to overall inflation increased to 220 bps in May 2011 from 208 bps during April 2011. However, the contribution of non-food (overall inflation excluding food inflation) inflation also advanced from 663 bps in April 2011 to 682 bps in May 2011. In percentage terms, the contribution of non-food items to overall inflation has eased from 76.0% in April 2011 to 75.4% in May 2011. On the other hand, the contribution of food items has increased from 23.9% in April 2011 to 24.3% in May 2011.

However, the contribution of raw cotton dipped by 25 bps, while that of fish-marine fell by 09 bps during May 2011. The contribution of coke and electricity (agricultural) fell 07 bps and 05 bps, while that of guava (05 bps), electricity-industry (4 bps), turmeric (4 bps), cabbage (4 bps), poultry chicken (3 bps) and electricity-domestic (3 bps) also dropped. Further, the contribution of Bus / Mini bus / Truck, Tapioca, Logs & Timber, Raw Rubber, Iron Ore also fell 2 bps each during May 2011.

RBI's Inflation Expectations Survey of Households: expect inflation to rise in Q1 FY2012

RBI has conducted the 23^rd round of Inflation Expectations Survey of Households in the January–March 2011 quarter. The survey captures the inflation expectations of 4000 urban households across 12 cities for the next quarter (April-June 2011) and for the next year (April 2011-March 2012). As per the results of survey, households expect inflation to rise further by 40 and 120 basis points during next quarter (11.9%) and next year (12.7%), respectively, from the perceived current rate of 11.5%. Households' expectations of general price rise were mainly influenced by movements in food prices. The percentage of respondents expecting price rise have gone down for all product groups (namely, general prices, food products, non-food, household durables, housing and services). Daily-wage workers and housewives expected higher inflation rates compared to other categories. Across cities, Bangalore registered the highest inflation expectations and Patna the lowest.

The official Wholesale Price Index for 'All Commodities' (Base: 2004-05=100) for the month of May 2011 rose by 0.7% from the previous months level. The annual rate of inflation, based on monthly WPI, stood at 9.06% (Provisional) for the month of May 2011 (over May 2010) as compared to 8.66% (Provisional) for the previous month and 10.48% during the corresponding month of the previous year.

Primary Articles (Weight 20.12%)

The index for Primary Articles group rose 0.3% during May 2011 from previous month's level. The index for 'Food Articles' group rose by 1.6% during May 2011 from the previous month level due to higher prices of jowar (10%), barley (8%), bajra (4%), fish-marine, fruits & vegetables and milk (3% each), fish-inland, condiments & spices and ragi (2% each). However, the prices of poultry chicken and masur (5% each), arhar (3%) and moong, tea, gram and wheat (1% each) declined.

The index for 'Non-Food Articles' group declined by 4.4% due to lower prices of logs & timber (17%), raw cotton (16%), fodder (10%), raw silk (7%), raw rubber (5%), sunflower and castor seed (3% each). However, the prices of flowers (22%), mesta, groundnut seed and rape & mustard seed (3% each), raw jute (2%) moved up.

The index for 'Minerals' group rose by 1.1% due to higher prices of zinc concentrate (39%), steatite (17%), magnesite (10%), barytes (4%), iron ore (2%) and bauxite (1%). However, the prices of sillimanite (23%) and chromite (5%) declined.

Fuel & Power (Weight 14.91%)

The index for fuel and power group rose 0.3% due to higher prices of lubricants (5%), petrol, light diesel oil and bitumen (4% each), furnace oil and lignite (2% each) and aviation turbine fuel (1%). However, the prices of coke (6%) declined.

Manufactured Products (Weight 64.97%)

The index for manufactured products group rose by 1.0% during May 2011 from the previous month level. Within the manufactured products group, the index for 'Food Products' group rose by 1.2% due to higher prices of copra oil, rice bran oil and tea leaf (unblended) (13% each), gur (10%), tea leaf (blended) (7%), groundnut oil and ghee (3% each). However, the prices of tea dust (unblended) (3%), sooji (rawa), sugar and oil cakes (1% each) declined.

The index for 'Beverages, Tobacco & Tobacco Products' group rose by 0.3% due to higher prices of dried tobacco (3%), rectified spirit (2%) and IMFL-blended (1%).

The index for ‘Textiles' group rose by 2.5% due to higher prices of cotton yarn (6%), cotton fabric (5%), jute sacking bag (4%), gunny and hessian cloth (3%), tyre cord fabric (2%). However, the prices of man made fibre, jute sacking cloth and woollen textiles (1% each) declined.

The index for 'Wood & Wood Products' group rose by 1.7% from the previous month level due to higher prices of plywood & fibre board (3%).

The index for 'Paper & Paper Products' group rose by 0.5% due to higher prices of paper cartons / boxes (4%), cream laid woven paper and kraft paper & bags (2% each) and newsprint, maplitho paper and paper for printing / poster (1% each). However, the prices of paper rolls (5%) and newspaper (2%) declined.

The index for 'Leather & Leather Products' group rose by 0.9% due to higher prices of leather footwear (2%).

The index for 'Rubber & Plastic Products' group rose by 0.4% due to higher prices of tubes (2%) and tyres (1%). However, the prices of rubber products (1%) declined.

The index for 'Chemicals & Chemical Products' group rose by 1.0% due to higher prices of non-cyclic compound (4%), pigment & pigment intermediates (3%), basic inorganic chemicals, agarbattis, di-ammonium phosphate, explosives, basic organic chemicals, ayurvedic medicines and hair / body oils (2% each). However, the prices of polymers and rubber chemicals (2% each) and dye & dye intermediates (1%) declined.

The index for 'Non-Metallic Mineral Products' group rose by 0.7% due to higher prices of asbestos corrugated sheet and slag cement (2% each) and grey cement (1%). However, the prices of white cement (3%) declined.

The index for 'Basic Metals, Alloys & Metal Products' group rose by 0.6% due to higher prices of silver (10%), sponge iron (7%), gold & gold ornaments and pipes/tubes/rods/strips (4% each), furniture and melting scrap (3% each), steel rods and joist & beams (2% each). However, the prices of copper / copper ingots and nuts/bolts/screw/ washers (3% each) and steel castings, copper products (other than wire), iron castings, brass, ferro chrome and steel: pipes & tubes (1% each) declined.

The index for 'Machinery & Machine Tools' group rose by 0.3% due to higher prices of UPS / stabilizer (8%), control equipments (6%), lifts, magnets, ball/roller bearing and fibre optic cable (3% each), chemical plant equipments, communication equipments and textile machinery (2% each). However, the prices of electric motor starters (5%), fluorescent tubes (3%), pump & assembly (2%) and computers, electric switch gears, hydraulic equipment and electrical pumps (1% each) declined.

The index for 'Transport, Equipment & Parts' group rose by 1.8% due to higher prices of railway brake gear (8%), motor vehicles (5%), tractors (4%), railway axle & wheel (3%), auto rickshaw / tempo / matador and auto parts (1% each). However, the prices of bus / mini bus / truck (2%) and bi-cycles (1%) declined.

Jay Shankar, Chief Economist, Religare Capital Markets

May headline inflation came provisionally at 9.06%, on Y-o-Y, in-line with our apprehensions. The surprise has been the pace of acceleration in manufactured products' inflation. Core inflation has now reached 7.2%. These are indicative of the strong aggregate demand momentum in the economy. RBI's own assessment of average inflation in H1FY12 at 9% is at risk. The silver lining is that the revisions to provisional numbers are likely to be less pronounced now. The need for aggressive fiscal consolidation can hardly be overstated. Fiscal policy makers in Delhi need to coordinate with monetary tightening to make the growth process more inclusive and sustainable. For the rate action on June 16, a 25 bps is for sure, while we do not rule out the possibility of a 50bps hike completely.

Indranil Pan, Chief Economists, Kotak Mahindra Bank

Inflation dynamics have continued to surprise on the higher side, with the gap between provisional and final figures also unnerving. Our calculations do not immediately imply any significant softening bias for headline WPI inflation below the 9% mark. Further pressures on inflation are likely, if electricity prices as also administered domestic fuel prices are revised higher. Global commodity prices have softened from peak levels, but could face some resistance to further dips as global liquidity stays intact.

The 23 round of survey of RBI also hints at inflationary expectations being on the higher side. Thus, even as some growth moderation is apparent, RBI is likely to keep up its hawkish rhetoric and hike repo rate by 25 bps on June 16. Interest rate markets are factoring these back into their expectations, leading to a rise back in the 1-year OIS yield to 8.02% (yesterday's close at 7.90%) and the 10-year 7.80% GS2011 yield to 8.32% (8.24% previous close).

Anjali Verma, Economist, MF Global India

Based on today's higher than expected inflation, we are upping our FY12 inflation estimate to 8.5-9% from 8% expected earlier, incorporating fuel price hike of Rs 3 in diesel and Rs 2 in petrol. Although, the economic growth is seen moderating, exemplified by weak Q4GDP data at 7.8%, IIP growth at 4.4% (old-base), and investment growth of only 2.2%, we maintain that RBI will remain focused on inflation as the rise in inflation has been pretty sharp and RBI is of the view that higher inflation is detrimental for a long-term growth sustainability. Additionally, Q4GDP data still indicates strong growth of 8% in private sector consumption spending and IIP growth with the new base looks good at 6.3% (RBI in the past has sighted lack of trust on the old IIP series due to its extreme volatility and outdated components, thus we expect RBI to lay more confidence on the new series as it is more updated and possibly a better reflection of the industrial production). Thus, we maintain our expectation of 50-75bps repo rate hike by RBI till Mar'11, of which 25 bps hike should take place on 16 June 2011 (scheduled credit policy meeting). We expect the policy statement to remain hawkish with a mention of weakening economic growth.

Rohini Malkani, Economist, Citi Group

Sticky trends in inflation, coupled with the RBI's recent stance of bringing down inflation at the cost of growth, prompt us to maintain our view of a further 75 bps of tightening in 2011. This would take policy rates to 8.00% by end-2011, with a hike likely in the 16 June meeting this week. We re-iterate our view that given underlying consumption dynamics and the fact that ~60% of the rise in inflation is commodity led and thus beyond the control of the RBI, the need of the hour is a pick-up in the investment cycle, productivity enhancements particularly in food processing, warehousing.

Based on available data, in the past 16 months from February 2010, WPI based inflation was 10% or above for five months, and 9% or above for 8 months, and between 8.2% and 8.9% on only 3 months. In the past 27 months from March 2009, WPI was always higher sequentially (higher than the previous month) in 26 months, and only in February 2010, it was same as in January 2010. In these circumstances, RBI has clearly indicated, "Reining in inflation should therefore take precedence even if there are some short-term costs by way of lower growth". So, despite the fact that IIP growth decelerated sharply from 13.1% in April 2010 to mere 6.3% in April 2011 (Base 2004-05), RBI may hike repo rates by another 25 basis points in the ensuing mid term policy review.