Nomura sees cost-push factors playing on inflation

MUMBAI: Firms are passing on higher input costs to consumers as reflected in a rise in the output price index, an indication that inflationary spiral is building up according to Nomura Research.

Inflationary pressures continue to build as the input price index rose to a 30-month high of 57.5 in February from 56.8 in January, led by higher costs for metals, chemicals, energy and plastic products. Firms responded to these higher costs by sharply raising their output prices. The output price index rose to a 40 month high of 53.4 from 50.7 as firms looked to expand their profit margins in February, Nomura said.

Overall, the manufacturing PMI data suggest activity has improved over the last two months. However, the absolute levels have yet to return to pre-demonetisation levels: the manufacturing PMI has averaged 50.5 so far in Q1 (January-February), lower than 52.1 in Q4 2016 and 52.2 in Q3’16

Nomura expects GDP growth to slow further in Q12017. The increase in the order -inventory ratio, though, is a positive. If orders continue to rise, then firms will soon need to ramp up production to meet demand. However, the sharp rise in output prices is a harbinger of cost-push inflation starting to feed through to consumers. Thus, it appears the economy is slowly transitioning towards a marginally higher growth-Inflation structure, it said.

India’s manufacturing PMI rose for a second month to 50.7 in February from 50.4 in January, which suggests the manufacturing sector is slowly emerging from the contraction zone it entered in December after demonetisation. Both domestic orders and export orders improved this month, but the pickup was higher in exports. Despite higher orders, firms drew down their finished goods inventory. As a result, the orders-to-inventory ratio rose to 1.12 in February from 1.10 in January.