Inflation at Wholesale levels were up 10.49% in April-2021.
Wholesale index includes- Primary articles (Food, Non-food, Mineral and Crude Oil) at 22.62%; Fuel (LPG; Petrol; HSD) at 13.15% and Manufactured Products (64.23%).
Here is an interesting chart from US which shows where the inflation from US came from in April-21:
Clearly the most depressed sectors of the economy namely airfares auto both sales and rental are leading the bounce back in inflation.
What’s happening in India though:
This massive increase in inflation came at the back of a negative 1.57% inflation in April-20.
The largest increase by the way came from fuel (20%) which actually is a fairly controllable item if the government so decides
Again remember in April-2020 oil sellers were paying you to buy oil as Oil prices went negative.
The soft base can continue to playout through 2021 as evident from the data below:
.At WPI level inflation didn’t become factor till Mar-21 when the base effect started playing out.
In Mar-20, everything went under lockdown, economic activity stopped and prices fell not only due to lack of demand but expectations that demand will not review.
However then we saw the phenomenon that I wrote about yesterday-“Pent-up Demand”.
The govt. stimulus in rural India, surge of demand for vehicles from tractors to 2W to Cars; consumer goods; housing etc., and a lot of governments around the world including India initiating infrastructure work led to not just demand revival but expectations for demand continuance.
Whats’ the Concern?
While investors believe that higher inflation is followed by higher interest rate leading to lower stock prices driven the by the profit impact of higher interest rates and input prices of raw material (most metals at all-time highs is an evidence).
However in the past we have seen that investors get driven by how well the corporates are doing irrespective of higher interest rates.
Alan Greenspan increased interest rates from 1.25% in 2004 Jan to 5.25% by the end of 2006, however the investors kept the faith and S&P 500 moved up by 20% during the same period.
What are we watching for?
Inflation on its own might not be a cause of concern.
- Higher demand takes time for supplies to adjust causing imbalances leading to higher prices.
- Inflation is a sign of growth if driven by demand.
- India saw over 6% inflation from, 2006 till great financial crisis when it was at 7.8%, however demand remained solid and equity markets made new highs.
The other issue is the ability of producers to pass on the inflation to consumers.
Currently as per the RBI inflations perception survey, consumers are expecting high inflation though it didn’t deter them from spending till March.
Spending got disrupted only by the second wave.
Low base, High demand followed by supply disruption has caused this spike.
While the expectation is for this higher number to continue for few more months as the low base continues to play out.
However sequentially the demand direction will determine, future course coupled with the high base that is building now.
This in turn will be determined the mental make-up of consumers and how along with when and where they get ready to spend post the severe impact of the 2nd wave.
Investors are worried and rightfully with the spectre of interest rate increase by RBI given low growth, however will RBI actually increase rates if the phenomenon is driven by supply factors and base effect and might not have much impact on interest rates.
Big question mark for investors.
For markets, the cause of concern will be driven by demand contraction and ability to pass-on prices to consumers.
The Anomaly will be caused in part by higher global demand and hence import of inflation in the backdrop of lower local demand.
These next 2 quarters investors should be watchful and must look for not just this but the subsequent 2 quarters as India tries to normalise.
Currently it’s a hope that things will be same as 2020.
However investors need to question this premise given the impact and magnitude of the second wave.
Can Inflation hence play further spoil sport leading to demand contraction given the very sombre mood in the country.
Keep watching this space.