The prices of consumer goods increased substantially in April, rising 1.38 percent MoM, because the Ministry of Commerce's price freeze ended in March, while fresh food and non-subsidized retail fuel product prices surged across the board, precipitating a sharp rise in inflation, and in turn, living costs during April. Headline Inflation then surged to 4.04 percent YoY, higher than the 3.14 percent pace in March.
However, KResearch is of the view that further sharp increases in consumer goods prices (as seen in April) will be unlikely in coming months because the volume of farm produce outputs should move back to normal levels, and the government's price controls and other measures to minimize higher living costs will probably keep consumer prices from rising too fast. Nevertheless, KResearch expects that Headline Inflation in 2Q11 may average close to 4.0 percent YoY, which would be higher than an average rate of 3.0 percent YoY in 1Q11.
As for 2H11, KResearch has assessed that inflation will remain high for much of that period, as producers will attempt to pass on higher production costs to consumers and diesel fuel, LPG and NGV prices (for both household and industrial uses) will increase if the subsidies on them expire as planned in September 2011. Cost-push inflation might later become considerable if global energy prices trend higher in 2H11. As a result, we expect that Headline Inflation will probably stand in a range of 3.6-4.6 percent over the year (base case at 4 percent), and Core Inflation would likely amount to around 2.4-3.0 percent (base case at 2.6 percent). Given this, high inflation and living costs will remain with us for at least until the end of 2011, representing an economic challenge for the government ahead.
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