Crisil core inflation tracker: Sharp fall in WPI led by food and fuel

Wholesale Price Index (WPI) inflation rate dipped for the second month in a row, plummeting 70 basis points (bps) to 2.8 per cent in January. WPI inflation had peaked to 4 per cent in November. 

The steep fall was led by a decline in food and fuel inflation and some easing in core inflation, the latter reflecting the weak pricing power of manufacturers. However, after staying stable for three consecutive months, inflation in manufactured products surged owing to higher global metal prices. 

So far this fiscal year (April to January), WPI inflation has averaged 2.9 per cent compared to 1 per cent in the corresponding period a year ago. Most of the pick-up is due to higher oil and commodity prices, though lower food inflation has capped the upside. Food inflation for the period is lower at 2.2 per cent this fiscal year, compared to 6 per cent, while fuel inflation is much higher at 9 per cent compared to 4.4 per cent. Manufactured products inflation is up at 2.6 per cent from 1 per cent. Most of the increase in manufactured inflation is due to higher metal prices. Base metals inflation for the said period is at 8.4 per cent from -3.1 per cent, while core inflation (manufacturing products inflation excluding base metals inflation) is at 1.5 per cent.

Core inflation — measured by the CRISIL Core Inflation Indicator or CCII — has, over time, offered a better perspective of demand-side impact on inflation in manufactured products. It also indicates the pricing power of manufacturers. CCII is computed after excluding inflation in (basic metals and products) from manufactured products, which is subject to high price volatility.

Going forward, food inflation could stay under check if monsoons are normal and global food prices stay benign. However, the Budget announcement on minimum support prices (MSPs), setting it at 1.5 times the cost of production, extension of MSP to all kharif crops, and assuring at least MSP is paid to all farmers, together with the rise in import duties, can feed food inflation. Also, if global energy prices continue to spiral up and the rupee stays weak, imported inflation can rise. Already, as the pent-up consumption demand in the economy returns and manufacturers’ pricing power improves, some upside to inflation is inevitable.

Overall food inflation (food articles plus manufactured food) declined to 1.6 per cent in January from 3 per cent in the previous month. The inflation in food articles fell Rs 170 bps. Inflation in cereals (at -2 per cent), pulses (-30.4 per cent), eggs, meat and fish (0.4 per cent) continued to decline. But the highlight of the month was the continued sharp fall in vegetables inflation (40.8 per cent, down from 56.5 per cent in December and from its peak of 59.9 per cent in November). Inflation in manufactured food articles dipped further into the negative zone for the second consecutive month. 

Fuel and power inflation more than halved to 4.1 per cent from 9.2 per cent in December. Inflation in coal fell nearly 380 bps, while mineral oils inflation dipped Rs 590 bps, led by a fall in inflation in diesel, petrol and naphtha, among others. 

Manufactured products’ inflation rose 20 bps on months to 2.8 per cent after staying fairly stable for the previous three months. Splitting this category into two parts gives us the core inflation (measured by CCII) and the base metal inflation. In January, core inflation eased 20 bps on-month to settle at 1.3 per cent, led by lower inflation in food, textiles, pharmaceuticals and chemicals, electronics, and manufacturing of furniture. Base metals inflation (which includes basic metals and fabricated metal products) rose to 10.7 per cent from 8.7 per cent in December. Global metal prices saw a steep increase of 22.7 per cent on-year and 5.3 per cent on-month, causing the base metal index in WPI to rise.