August WPI fall in sync with global commodity complex trend

Headline inflation, as measured by the Wholesale Price Index (WPI), fell to -4.95 per cent in August, from -4.05 per cent in July, as fuel inflation plunged and manufactured products inflation continued to slide. Core inflation, as measured by the CRISIL Core Inflation Indicator (CCII), fell to -0.8 per cent in August compared to -0.5 per cent in July, marking the fourth consecutive month of decline in the index value. The sharp decline in global crude oil and commodity prices has more than offset the fall in the rupee and brought down input costs for Indian manufacturers. The decline in core inflation is also symptomatic of sluggish domestic demand conditions.

Food inflation turned negative, touching -1.2 per cent in July, but the decline was curbed in August to -1.1 per cent, as inflation in pulses rose to 36.4 per cent compared to 35.8 per cent in July. In April to August this financial year, inflation in pulses stood at 29.5 per cent, compared with 2.7 per cent in the corresponding period in the last financial year. Most of this was led by tur, or arhar, for which inflation in August was as high as 48.4 per cent. The sharp and continued rise in pulses inflation is a cause of worry, given the rising rainfall deficiency.

Rains have so far been lower than forecast by the India Meteorological Department. As on September 13, rainfall was 16 per cent below normal, with acute deficiency of 40-44 per cent in some districts of Uttar Pradesh and Maharashtra. CRISIL's Deficient Rainfall Impact Parameter, or DRIP, index combines the impact of vulnerability and shocks to identify crops and regions most hurt by weak rains. According to the latest DRIP scores, Maharashtra, Gujarat, Uttar Pradesh and Karnataka are the most affected states, while tur, jowar and soyabean are the most affected crops. This suggests that pulses inflation could be a menace this year.

Manufactured products also contributed to the overall inflation decline in August. Here, inflation fell to -1.9 per cent, from -1.5 per cent in July, as prices of manufactured food products (mainly sugar), textiles, and basic metals and alloys tangoed the fall in global commodity and crude oil prices, and domestic demand remained sluggish. So far in the current financial year, global metal and mineral prices have fallen an average 19.7 per cent year-on-year, while global fuel prices have slipped 44.4 per cent, which has substantially brought down input costs for Indian manufacturers.

Disinflationary pressures on core and manufactured products indices have intensified due to excess capacities in the manufacturing sector because of slack domestic demand. The sluggishness is clearly visible from the sustained decline in CCII. August marked the fourth consecutive monthly decline in the index value. Inflation on the barometer fell to -0.8 per cent from -0.5 per cent in July.

Another measure of core inflation, non-food manufacturing inflation (which includes the volatile base metals category), reported a sharper fall during the month (-1.9 per cent compared with -1.4 per cent in July).

CCII offers a better perspective on core inflation because it negates the effect of volatile categories. It excludes the 'base metals' category since its prices are mostly determined by changing global demand-supply dynamics and volatility in exchange rate rather than just domestic conditions.

This exclusion caused a variance in CCII and non-food manufacturing inflation during August. Global metal prices fell 28.9 per cent year-on-year in August, which caused domestic wholesale price inflation in the basic metals category to fall to -7.6 per cent from -6 per cent in July.