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Surge in cost push inflation: diverging trends side

The upward inflationary phase is gaining strength where headline CPI inflation has risen to 13.68%YoY in Jan’10 inline with our estimate 13.5%YoY. This represents a significant jump from 10.5%YoY CPI inflation in Dec’09. Rising inflation and lowering expectations of monetary easing (in the near term) prompted primary yields to rise by 5bps-16bps in the T-Bill auction held yesterday.

In our view headline inflation will further increase in Feb’10 due to:
1) 5-9% hike in domestic fuel prices in the beginning of the month
2) lower base effect in Food CPI till Mar’10, to drive food inflation
3) cumulative second round impact of 16.5%FYTD increase in power tariffs
AKD Research
February 11 2010

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