Retail inflation seen rising in July – DBS Bank

Retail inflation print is likely to come higher than June due to high fruit and vegetable prices, and the government should act to resolve supply constraints, DBS Bank said in a report.

Consumer inflation and IIP numbers are out tomorrow, while wholesale inflation numbers are expected on Thursday.

“Headline CPI inflation in July is seen at 7.9% YoY, from June’s 7.3%. WPI inflation is seen at 5.5% from June’s 5.4%,” DBS Bank said.

High frequency data show that vegetable prices (average of three widely used varieties) were up 25% on the year in July, it added.

“In contrast, rice prices have been flat even as government’s excess stocks are still to be off-loaded. These factors are likely to lift the food inflation index back above 9.5% from 7.9% the month before. This rebound is a combination of seasonal upturn and inadequate supplies, piling pressure on the government to expedite measures to address supply-side shocks.”

High inflation is a key reason for voter discontent under the previous government, and the current government has promised to contain food price increases.

Lagged impact of higher freight charges are being factored in, though moderation in housing and fuel indices is likely to offset part of the impact, the foreign bank said.

“The core CPI should stay within 7.5-7.8% and will be under scrutiny to monitor if supply shocks morph into generalized pressures. In the meantime, jump in July inflation readings will vindicate the central bank’s decision to keep rates on hold and maintain a cautious stance.”

Bulk of the monthly data is also due this week. July trade numbers will be on the tap anytime, with June industrial production (IP) and July CPI inflation out on Tue. July WPI inflation is scheduled for Thu (14 Aug).

“July trade deficit is likely to stay wide at circa USD 11bn on the back of gradual pick-up in non-oil import demand. Base effects will also prop headline import growth, while exports stabilize on nominal terms. Nonetheless, the year-to-date built up in the trade deficit in the Jun14 quarter is the narrowest is the past three years, suggesting upside risks to the current account shortfall remain subdued.”

It also expects a moderation in industrial production to 4.0% YoY in June from May’s 4.7.

“Spurt in the core industries index to 7.2% was influenced by favorable base effects, with the same factor to lift electricity generation up a sharp 15.6% YoY in June. Mining and manufacturing sectors growth should also benefit from negative readings in the comparable period last year. Nonetheless, stable export demand should boost the manufacturing sector this year, until consumption demand recovers in the second half. Passenger vehicle sales continued to contract in the Jun quarter, along with subdued demand for commercial vehicles,” it added.