Higher food prices lift WPI inflation

Wholesale price inflation (WPI) remained negative in December but moved up to -0.7 per cent, from -2 per cent in November, due to a surge in food inflation (especially vegetables, eggs, meat and fish). But falling global crude oil and commodity prices, and weak domestic demand conditions ensured that fuel and manufactured products' inflation continued to fall faster than overall inflation. Core inflation, as measured by the CRISIL Core Inflation Indicator (CCII) crept into positive territory on some seasonal demand pick-up, after staying negative for nearly five months.

Food inflation (primary plus manufactured food) jumped 230 basis points over November, to 6.2 per cent. The inflation index shed its low base effect in November and was mainly driven by rapid prices increases in vegetables (20.6 per cent inflation rate), fish (8 per cent) and chicken (12.8 per cent). Pulses inflation fell this month for the first time in eight months but, at 55.6 per cent, remains considerably high. Within pulses, inflation fell in gram, moong and masur but surged to 82.3 per cent in tur (arhar) and 80.8 per cent in urad. High pulses inflation continues to be an area of concern - so far it has averaged 39.3 per cent during April-December compared to 3.4 per cent in the same period last year.

There are also concerns on the prospects of the rabi crop, after kharif production suffered. Rabi sowing until January 8 lagged last year's levels - sowing of rice, wheat and oilseeds has declined 8.4 per cent, 5.9 per cent and 3.8 per cent on-year, respectively, while sowing of pulses has dropped 0.3 per cent. The rabi crop accounts for 50 per cent of total foodgrain production, and almost 100 per cent for some crops, so the pressure on inflation will mount if production is low.

Meanwhile, inflation continued to decline in the 'fuel and power' category, but the fall this month was lower due to the excise duty hike imposed on petrol and diesel in December. Fuel and power inflation fell to -9.1% from -11.1% in December.

Inflation in the manufactured products' category was unchanged from the previous month, at -1.4%. While inflation rose in food products, paper products and non-metallic mineral products, other sectors such as wood products, rubber products and basic metals continued to limit the pressure on inflation. In addition, the continued weakening of the rupee (6.6% on-year this fiscal), falling metal and mineral prices (-23.1%) and oil prices (-45.7%) have kept manufacturing costs low. Alongside, sluggish domestic demand and huge unutilised capacities have reduced manufacturers' pricing power and kept core inflation benign.

This month there were divergent trends with respect to core inflation numbers. While the non-food manufacturing inflation measure - which includes the volatile base metals category - fell to -2% in December, from -1.9% in November, the CCII turned slightly positive at 0.1% compared to -0.1% in November. The minor pick-up in CCII is likely to be reflective of some seasonal demand pick-up.

The CCII offers a better perspective on core inflation as it negates the effect of volatile categories. It excludes base metals as their prices are mostly determined by global demand-supply dynamics and volatility in exchange rates, rather than just domestic conditions.

This exclusion causes a variance between CCII and non-food manufacturing inflation. Global base metal prices dropped 20.2% on-year in December, driving down wholesale inflation in this category to -8.7% compared with -7.8% last month.