Inflation to hover around and above 5% in the coming months

Underlying demand-led pressures will join up with rising commodity prices to keep inflation readings on the high end for a while, HSBC said.

Leif Lybecker Eskesen, Chief Economist for India & ASEAN said inflation remains elevated as the underlying cost-push (food and fuel) and cost-pull (tight capacity) inflation pressures are not likely to disappear anytime soon.

AT 5% March CPI inflation matched February's reading of 5.0% y-o-y. Core inflation, however, was up.

While annual inflation for clothing, transport, and health care eased relative to February, inflation for housing,
communication, and recreation pulled in the other direction.

In sequential terms, non-seasonally adjusted, headline CPI inflation rose 0.1% m/m (vs. -0.1% in February) led by clothing, housing, and transportation (the latter, driven by car prices, declining by less than in February).

On a seasonally adjusted basis, CPI was up 0.3% on a m/m sa basis (vs. 0% in February by our estimate) and eased on a 3m/3m SAAR basis (7.6% vs. 8.4% in February).

Core inflation (excluding food and energy) rose to 3.7% y-o-y (vs. 3.2% in February). On a sequential basis, core inflation picked up on a m/m sa basis (0.7% vs. 0.5% in February) and on a 3m/3m SAAR basis (5.9% vs. 3.9% in February).

The core inflation number tracked by the Monetary Authority, which excludes costs of accommodation and private road transport, was steady at 1.8% y-o-y and up 0.1% m/m sa (vs. 0.2% in February).

Eskesen said signs point to inflation remaining at 5% in the future and might even go up as uncertainties in the market remain.

The economist said the rising prices of basic goods and the increasing wages are some of the factors driving up inflation.

"First of all, international commodity prices are driving up inflation and with the unrest in the Middle-East not anywhere near to an end, the pressures from this front will be with us for a while still. Secondly, food inflation, in response to global supply disruptions, is an issue and will also linger, certainly in terms of price levels even if the rate of food inflation will ease a bit.

Thirdly, strong labor market conditions are pushing up wages. Finally, related to the latter, with the economy still
operating at or above its potential and demand conditions remaining strong, it is easier for businesses to pass on higher costs onto consumers.," Eskesen said.

The economist added there is likely to be "somewhat softer readings" on economic activity over the next few months due to elevated oil prices and the spillovers from the tragic events in Japan

Eskesen noted, though, that capacity will remain tight as the predicted developments would still not suffice to bring about slack in the economy.

"The MAS, seemingly sharing this view, was, therefore, right to tighten policies in April," the economist said.

He added that the additional tightening will take time to filter through to economic activity given the usual monetary policy lags.

"Moreover, the MAS left the band wide and kept the center slightly below the pre-meeting levels for the NEER, allowing for flexibility to address downside risks to growth and inflation in the event, for example, a rapid increase in oil prices pose threats to the global economic recovery," Eskesen said.