Inflation peters in November

Global factors, including fall in oil prices, pull down WPI-based inflation to 0%

Wholesale price index (WPI)-based inflation dropped to zero per cent in November, the lowest level in five-and-a half years, from 1.7 per cent in October. The sharpest fall was witnessed in the prices of primary and fuel articles, the latter due to the sharp fall in global oil prices. Prices contracted by 4.9 per cent in fuel and power and by one per cent in primary articles.

Within primary articles, non-food saw a 3.7 per cent decline in prices and inflation in food articles slowed down to 0.6 per cent. Vegetable prices saw a sharp decline of 11.8 per cent in November, offsetting high inflation in milk (10 per cent) and eggs, meat and fish (rose to 4.4 per cent). Overall food inflation fell to 0.8 per cent from 2.5 per cent in the previous month.

Fuel inflation also fell 4.5 percentage points (ppt) as petrol, kerosene, and diesel prices dropped, while inflation in electricity remained unchanged at 2.9 per cent. Crude oil prices for the Indian basket ended November at to $72 a barrel compared to $83.8 a barrel in October.

Prospects of lower oil prices over the medium term will also temper inflationary expectations going ahead. However, in the coming months, the impact of lower oil prices on inflation might be contained somewhat as it is offset by the recent increases in excise duty on petrol by Rs 3.75 a litre and diesel by Rs 2.50 a litre by the government (announced in November and December).

Core inflation - an indicator of demand-side pressure on prices - also stepped down in the month. Non-food manufacturing inflation fell to 2.2 per cent in November from 2.5 per cent in October. Inflation fell the most in chemical products by 0.4 ppt, basic metals by 0.8 ppt and rubber products by 0.5 ppt in November. Inflation in transport, equipment and parts reduced to 0.1 per cent in the month, compared to 2.7 per cent witnessed in the starting of the financial year in April.

CRISL Core inflation Indicator (CCII) - an alternative measure of core inflation, which is calculated by removing metal prices from the prices of manufactured articles - stood at 2.2 per cent in November, compared to 2.6 per cent in October.

The reason that metals are excluded from the CCII is that metal prices are mostly determined by changing global demand-supply dynamics and volatility in exchange rate rather than domestic conditions alone. However, in November, overall basic metals inflation was only 0.3 per cent in November (versus 1.1 per cent in October) with easing ferrous metals inflation offsetting the rise in non-ferrous metals inflation. Therefore, CCII and the non-food manufacturing inflation were at similar levels in November.

That said, CCII dropped by 0.4 ppt while the decline in non-food manufacturing was smaller at 0.28 ppt compared to the October figures. This is because CCII includes manufactured or processed food prices which fell to 1.2 per cent from 2.1 per cent in October. Manufactured food prices reflect second-round impact of inflation in primary food articles, and therefore capture domestic demand-side pressures in the economy. As inflation in primary food articles fell sharply and demand continues to remain fragile, manufacturers of food articles seem to have passed on the falling costs to consumers.

Going ahead, downward pressures on the CCII are likely to continue as food inflation remains contained with lower minimum support price increases and proactive measures taken by the government against any shocks.