WPI bucks trend in June; core inflation heads up

Headline inflation, as measured by the wholesale price index (WPI), came in at -2.4 per cent in June - unchanged from the previous month.

The disinflationary trend that began in November 2014, led by a decline in food inflation and global commodity prices, was somewhat arrested as inflation in non-food articles rose and decline in fuel inflation halted. Food inflation continued to decline, but the downside was limited due to rising price pressure in some pulses because of short supply. This month, for the first time in nearly a year, the CRISIL Core Inflation Indicator (CCII) rose suggesting signs of demand revival in the economy.

Since November 2014, the global fuel and energy price index has fallen 40.6 per cent year-on-year (y-o-y), while the global metal price index is down 17.8 per cent y-o-y, and domestic food inflation has halved to an average 0.5 per cent compared with the previous year.

The downward pressure on inflation has been further supported by excess capacity as revival in domestic demand remains sluggish. This is also driving down manufactured products' inflation and is clearly visible if we strip food, fuel and basic metals off headline inflation, which has been decelerating rapidly. The CCII, thus constructed, fell to an average 0.8 per cent between November 2014 and June 2015, compared with 3.8 per cent a year ago.

In June, the CCII rose, to 0.1 per cent from -0.1 per cent in May, which hints at incipient signs of a gradual revival in demand conditions. In contrast, the non-food manufacturing inflation declined further to -0.9 per cent in June from -0.6 per cent in May, led by a sharp fall in base metals' inflation.

Food inflation declined 2.9 per cent from 3.8 per cent in May despite rising price pressures in the 'pulses' sub-group. Inflation in pulses touched a high 33.7 per cent in June, which is the highest in nearly three years, as production has suffered largely a result of weak monsoons last year and damage to crops from unseasonal rains this year. Higher MSPs and resort to imports, which are currently costly, could add to further price pressure. Within the pulses category, tur and urad saw the highest inflation rates. This month, non-food articles inflation rose led by higher inflation in commodities such as oilseeds and sugarcane.