An imported lift for WPI

Wholesale inflation is once again diverging from retail. In January, the Wholesale Price Index (WPI)-based inflation took a U-turn and jumped to 5.2 per cent from 3.4 per cent in December, while the Consumer Price Index (CPI)-based number veered to 3.2 per cent from 3.4 per cent.

The divergence is because the two gauges assign different weights to food and fuel — the two categories that are altering inflationary trends in India at present.

The surge in WPI in January was led by a sharp increase in fuel inflation as well as an uptick in manufactured products’ inflation. Within fuel categories, the sharpest increase was in coking coal — up 84 per cent inflation, followed by furnace oil (75.3 per cent), aviation turbine fuel (38.5 per cent), naphtha (37.3 per cent) and diesel (31.1 per cent).  Most of this is because global oil and commodity prices have been rising amid a weaker rupee. Since October 2016, crude oil prices have risen nearly 27 per cent on-year, while the rupee is 2 per cent weaker, providing a lift to imported component of inflation.

In contrast, food inflation somewhat stabilised during the month. Food inflation (primary plus manufactured) stood unchanged from the previous month, at 2.8 per cent in January.

The highlight, however, is core inflation, measured by the CRISIL Core Inflation Indicator (CCII), which, regardless of changing inflationary trends — decline in WPI from August to December 2016 and a pick-up in January — has stayed sticky in the 3.3-3.4 per cent zone. A steady CCII inflation rate suggests that demand conditions have remained sluggish even after the cash crunch caused by demonetisation. It is this stickiness in core inflation that worries the central bank, albeit at the consumer inflation level. Going forward, we expect some upside pressures on inflation as the imported component of inflation nudges up. Also, as the economy is remonetised, some pent-up demand will have returned. The stickiness in core inflation despite continued decline in other parts of the index is a worry since wage-price negotiations based on a sticky core can potentially lift overall inflation.

The other core inflation measure – non-food manufacturing, which includes the volatile base metals category and excludes food products – is less steady and has been moving in line with the overall WPI. Inflation measured by this measure rose to 2.7 per cent in January, from 2.2 per cent in December. CCII, therefore, offers a better perspective of demand-side impact on inflation by negating the effect of volatile price categories. Inflation in the ‘basic metals, alloys and metal products’ category, jumped to 8 per cent in January from 5.4 per cent in December,  as global base metal prices rose 29 per cent on-year, and rupee stayed weak against the dollar, making imports expensive.

Interestingly, within the manufacturing index, inflation in wood and wood products, and non-metallic mineral products, has been easing since November, which possibly reflects the negative impact of demonetisation on demand in the construction-related sectors.