What Is Driving WPI to Higher Levels?
We divide the WPI items into four groups: 1) food; 2) fuel and electricity; 3) global commodities ex-mineral oil; and 4) non-food, non-global commodities. The bulk of the acceleration in headline inflation from the low of 3.1% during the week ended November 24, 2007, to the current peak of 11.89% during the week ended June 28, 2008, has been driven by the rise in food, oil and global commodities ex-oil prices. Indeed, the rapid increase in oil prices has been the key driver of the recent spike in inflation. Since end-April 2008, while the crude oil price (WTI) has increased by 27.9% to US$145/bbl currently, the CRB Foodstuff Index has risen 7.4% and the CRB Commodities Index has fallen 0.3%. Where Do We Go from Here? We performed a simulation exercise to gauge the potential movement of inflation over the next 12 months. Our analysis is based on three possible scenarios for the inflation cycle: Base case: Our base-case assumption is that the crude oil price (WTI) averages US$145/bbl ove
