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Primary Articles Inflation Spikes to 17.24%

Whoa. The latest WPI data on primary articles has taken WPI inflation on primary articles to 17.24%.

WPI primary articles at 17.24%

Dangerously, the past revision spikes are reoccurring. Just look at the last two revisions:

Date First Report Revision Difference
16/10/2010 16.62% 17.91% 1.29%
23/10/2010 15.43% 17.09% 1.66%


On a graph this looks pretty bad:

Primary Articles Inflation: Revisions

At the rate this is going, we may be at 19% on Primary Articles, which we’ll find out after the data is revised. But note that this week and perhaps the next month has a big base effect. (last year wasn’t too bad during this time)

Primary articles -Food, base materials etc. – is where inflation is seen first. This impacts input prices of derived items like packaged food, or cars or whatever. WPI doesn’t take into account rent or services, but it’s safe to assume that primary articles inflation will move into manufactured goods also with a time lag, if it’s not a temporary price move.

That means, if there’s a short-term spike (like some onion prices going up to Rs. 80 for a week and then falling back to Rs. 20), then the companies at the other end of the chain might opt for a margin squeeze rather than raising prices. A restaurant that uses onions won’t increase its prices immediately on a price spike of onions – if that went away in a week, they’ll say “tough week” and move on.

But if prices remain consistently high at the primary level (inputs), then the manufacturers won’t have much choice. And when they hike prices, it’s more “sticky” – they don’t revise often, but when they do, they stick with the revision for a while. Now WPI primary articles inflation has been about 15% for most of the year and has again gone above it, and this is about when there is going to be a squeeze, and manufactured goods prices will go up.

The RBI has absolutely no option now but to raise rates, but that won’t help immediately. What it has done till now is to only kinda-sorta raise the short-term rate to about 7%. In fact we have a FLAT yield curve which 1 year money around 7.1% and 10 yr. bonds about 7.9%. In other places though, money is substantially more expensive – CDs and Commercial Paper are going at 9-10%.

This is
not good for the economy, and because we have a slow transmission system, we will see high inflation and high interest rates for a while – as much as 12 months – before things get under control. Somewhere along the way, markets will crash. That is just how markets have to react, because high-everything is not sustainable and people will get jittery. You will get reports of how inflation and interest rates and liquidity will do serious damage if you don’t get out now, but by that time it will already be too late; typically we see the impact of inflation much after inflation has occurred. 

But since we’ll see growth first (inflation is very good for stocks in the short term) => the markets should go up first. How much, I don’t know. To quote Soros, markets are unpredictable so why bother predicting them.

That was a LONG rant. I’m very wary of getting into interest rate sensitives (banks, real estate, auto) – in fact, am rethinking my Ashok Leyland pick now. It will be very interesting to find zero debt companies and watch them over the next year; they should really benefit, and there are a lot of them nowadays.

From a technical perspective, this is a non market until it crosses the previous high. Though some stocks are showing enthu, I would wait for the market to respond.

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