Core inflation creeps up

Wholesale price inflation (WPI) slipped further into negative territory in January, to -0.9 per cent from -0.7 per cent in December, amid sharp decline in global crude oil and commodity prices. In January, crude oil prices for the Indian basket averaged a record low of $28.1 per barrel (down 39.7 per cent on-year), while the global metals and minerals index fell 23.3 per cent.

This, coupled with low capacity utilisation rates (due to weak domestic demand), caused fuel and manufactured products' inflation to fall faster than overall inflation. Core inflation, as measured by the CRISIL Core Inflation Indicator (CCII) crept up led by rising inflation in food products. Excluding food products, CCII inflation was negative.

In January, food inflation (primary plus manufactured food) declined to five per cent from 6.2 per cent in December, largely due to fall in primary food inflation (to 6 per cent from 8.2 per cent) led by lower inflation in foodgrains and fruits and vegetables.

Pulses inflation also fell, after reaching a peak of 58.1 per cent in November, but was still high at 44.9 per cent in January, with items such as tur (arhar), and urad reporting 70.5 per cent and 64.8 per cent inflation rates, respectively. Meanwhile, inflation in processed food (food products) jumped up 80 basis points, to 2.8 per cent, with the pass-through of rising inflation in milk and persistently high pulses inflation beginning to show up.

Inflation continued to decline on-year in fuel and power but the inflation rate was unchanged from the previous month, at -9.2 per cent. The fall in global oil prices caused a steep decline in inflation in categories such as aviation turbine fuel, diesel, naphtha, bitumen and furnace oil. The slump in global oil and commodity prices continued to make imported inputs cheaper for manufacturers despite further weakening of the rupee.

This, in addition to low capacity utilisation rates, has reduced manufacturers' pricing power and kept core inflationary pressures benign. During the month, the rupee declined by 6.7 per cent average on-year, while metal and mineral prices dipped 23.3 per cent and oil prices for the Indian basket fell 39.7 per cent. Therefore, inflation remained soft in broad categories such as textiles, wood products, rubber and plastics, and chemicals. An interesting phenomenon has been the diverging trend in two core inflation measures.