New WPI series suggests higher core inflation rate in past 6 months: CRISIL

WPI inflation for April is at 3.9%, which is 144 (bps) lower than the March inflation rate

The Ministry of Commerce and Industry unveiled the revised wholesale price index (WPI) on May 12, 2017 as per the 2011-12 base year. As per this release, WPI inflation for April is at 3.9%, which is 144 basis points (bps) lower than the March inflation rate. The decline is mainly due to a 500 bps fall in fuel inflation and an over 200 bps decline in the inflation rate of primary articles. The new series records WPI inflation in fiscal 2017 at 1.7%, 200 bps lower than the number as per the old (2004-05) series.

The revised series has two key features:

1. Excludes central excise duty from prices: The series removes the excise duty component from prices, bringing the measure closer to the producer price index and, at the same time, making it less responsive to changes in tax rates. Hereon, the consumer price index (CPI) will continue reflecting the impact of tax changes (including the impact of goods and services tax or GST implementation on prices). In that sense, therefore, the gap between CPI and WPI can be a crude gauge of the impact of GST on prices.

2. More relevant to the current economic structure: The WPI series adopts a more recent base year and is now aligned with the gross domestic product (GDP) and index of industrial production (IIP)– also revised – series. This allows for a more meaningful comparison of the parameter, including the GDP deflator measure. This base year revision also allows items (such as natural gas, petroleum coke) to be included, the production share of has increased overtime. This makes the index more relevant to the current structure of the economy.On the same line, weightages have undergone a change.

So what does the new series suggest?

Inflation rate is lower,which could lead to an upward revision in past real GDP growth rates:The real GDP estimates (measured from the expenditure side) are computed by deflating the nominal GDP data. A lower WPI inflation rate could, therefore, pull up past real GDP growth rates for fiscal 2017, provided other factors influencing GDP remain unchanged in the revised data. Headline WPI inflation is lower by nearly 2 percentage points in fiscal 2017, and nearly 1 percentage points for preceding fiscals.

The revised series shows a slightly sharper price-negative impact of demonetisation in the third quarter: Comparing quarterly data for WPI under the two series shows a sharper fall in WPI during the third quarter of fiscal 2017 as per the new series. WPI inflation fell to 0.2% in the third quarter from 1% in the previous quarter. In comparison, the old series saw WPI inflation fall 30 bps to 3.5%. The divergence mainly arises from the primary articles and manufacturing sub-groups. 

The new index suggests core inflation could be higher than earlier perceived: The CRISIL Core Inflation Indicator (CCII) is computed by excluding base metals from manufacturing inflation. This measure is less volatile and believed to be a better indicator of underlying demand pressures in the economy compared with non-food manufacturing inflation, which includes the base metals index but excludes the food index. Therefore, CRISIL actively tracks the CCII. Index values for base metals data have not yet been made available. Therefore, looking at the inflation rates for the manufacturing index and base metals index suggests core inflation measured by the CCII – at least in the past six months – could be higher than estimated through the old base. However, it is seen trending down as was observed under the old WPI series with the 2004-05 base.

CCII maybe higher than perceived earlier

Source: Ministry of Industry and Commerce, CEIC, CRISIL Research