WPI inflation rises to 1.9% in July, reverses a 4-month downtrend

Core inflation eases further as pricing power remains low

Inflation based on the wholesale price index (WPI) reared up to 1.9 per cent in July after four months of sustained decline, fuelled by a pick-up in food inflation even as fuel and core inflation continued to fall.

Just the previous month, WPI inflation had printed at 0.9 per cent – its lowest level in nearly a year – on the back of plunging food and fuel inflation and some moderation in core inflation.

Overall food inflation (food articles plus manufactured food) surged to 2.1 per cent, up from -1.3 per cent in June. Fuel inflation fell – albeit at a slower pace – to 4.4 per cent, from 5.3 per cent, led by falling global oil prices, while core inflation (measured by the CRISIL Core Inflation Indicator, or CCII) - which excludes the volatile food articles, metals and fuel prices - eased to 1.2 per cent, from 1.5 per cent.

CCII has, over time, offered a better perspective of demand-side impact on inflation in manufactured products – reason why it also indicates the pricing power of manufacturers. CCII is computed after excluding inflation in ‘basic metals’ from manufactured products, which is subject to high price volatility. Inflation in this metals category rose to a record high of 9.4 per cent in July, from 7.9 per cent in June. Domestic metal prices typically move closely with global prices. In July, the global base metal index rose 18.8 per cent on-year, causing domestic prices to also rise. Consequently, the other measure of core inflation – non-food manufacturing inflation, which includes metal prices - rose to 2.2 per cent, from 2.1 per cent.

Source: CRISIL

Interestingly, the overall inflation in manufactured products fell for the fifth straight month, suggesting weak pricing power, although the pace of decline has slowed of late. At 2.2 per cent, inflation in the category was down just 10 basis points (bps), compared with June. Manufactured food and beverages, textiles, leather products, wood products, chemicals and pharmaceuticals, rubber and plastic products, and electrical equipment saw a decline in inflation, while tobacco products, apparel, paper products, non-metallic minerals, basic metals and products, transport equipment, computer electronics and machinery and equipment witnessed a pick-up.

Meanwhile, falling global crude oil prices and currency stability kept domestic fuel inflation in control. In July, the rupee stayed stable, while crude oil prices fell nearly 4 per cent on-month and over 8 per cent on-year. Inflation fell in most fuel categories, with the sharpest fall seen in aviation turbine fuel (down to -3.8 per cent, from 8.6 per cent in June), kerosene (down over 400 bps on-month to 20.8 per cent) and diesel (down 160 bps to 5.5 per cent).

Food inflation changed course to surge to 2.1 per cent, from -1.3% in June, as the base effect waned and seasonal increase in vegetables inflation took hold. However, a continued decline in pulses and cereals inflation (bolstered by high output) capped the upside in food inflation. Inflation in food articles jumped to 2.1 per cent, from -3.5 per cent, whereas inflation in manufactured food products eased to 2.1 per cent, from 3.1 per cent. Inflation in vegetables soared to 21.9 per cent, from -21.2 per cent in June, while that in pulses fell to -32.6 per cent, from -25.5 per cent, and in cereals to 0.6 per cent, compared with 1.9 per cent. July also saw inflation in eggs, meat and fish rise to 3.3 per cent, from 1.9 per cent.

The months to come could see a bump-up in prices, as some food items see their low-base effect wear off. On average however, for the fiscal year (FY18), healthy agriculture production following normal rains, benign global prices and moderate increases in minimum support prices are expected to keep a tab on food inflation, while fuel inflation will stay low, given softer global oil prices. Meanwhile, slow pick-up in consumer demand also suggests that core inflation pressures could stay weak.