CRISIL core inflation tracker: Many moving parts in WPI

Food inflation continued to dip for the 5th consecutive month on fresh supplies entering the market

The Wholesale Price Index (WPI)-based inflation took a U-turn in December, rising to 3.4 per cent from 3.2 per cent in November. Food inflation continued to dip for the fifth consecutive month on fresh farm supplies entering the market, and given healthy rabi crop prospects. But higher global oil and metal prices and weaker rupee pulled up manufacturing and fuel inflation, which together comprise 80 per cent of the index. The two core inflation measures, too, displayed divergent trends. Non-food manufacturing inflation (which includes base metals) rose to 2.2 per cent in December, from 1.6 per cent in November, while the CRISIL Core Inflation Indicator (CCII) was steady at 3.4 per cent — the latter suggesting that demand conditions stayed sluggish due to the demonetisation-led cash crunch in December.

Food inflation (primary plus manufactured) fell to 2.8 per cent, down 150 basis points (bps) over the November inflation rate. Inflation in food articles turned negative to minus 0.7 per cent in December, led by sharp price declines in fruits and vegetables (inflation at minus 17.4 per cent) and softening inflation in all protein items (pulses, eggs, meat and fish). A bumper kharif crop last year had supported lower food inflation so far and rabi sowing, too, is showing healthy progress. Latest data show that rabi sowing (until January 13) is six per cent higher than last year’s levels — sowing is up for wheat (seven per cent), oilseeds (8.5 per cent) and pulses (11 per cent). Inflation in these three commodities has stayed elevated at nearly 11 per cent average for the past two years. So, higher production will bode well for prices.

 

 

Since October 2016, global oil and metal prices have been steadily firming up, while the rupee too has been weaker against the US dollar causing the imported component of WPI inflation to steadily move up. Global oil prices rose 45.8 per cent on-year and 17.7 per cent on-month in December, while the rupee was two per cent weaker on-year and 0.4 per cent weaker on-month. In December, fuel inflation jumped to 8.7 per cent, up 160 bps from November, while inflation in manufactured products moved 60 bps up, to 3.7 per cent. Within manufacturing, base metals inflation recorded the sharpest rise — 5.4 per cent in December, from 2.9 per cent in November. But a few other sectors (such as rubber and plastic products and transport equipment), which are likely to have experienced the impact of pass-through effects of higher import cost, also saw a pick-up in inflation.