The wholesale price index (WPI) data for March triggered some bullishness when it was announced. WPI inflation ran at 5.96 per cent versus 7.69 per cent March 2012. This is the first time since late 2009 that WPI inflation has fallen below six per cent.
Some details make the data look suspect. For example, WPI for January has been revised up sharply. It seems that inflation ran at 7.3 per cent in January and not 6.6 per cent as in the initial estimates. If Inflation was actually 7.3 per cent in January and 6.84 per cent in February, the drop in March was very steep.
The second detail frankly leads to disbelief. Food, which has a 13 per cent weight in WPI, ran at 7.6 per cent in the March WPI, down from 11 per cent in February. In the Consumer Price Index released last week (where food has near 50 per cent weight), food inflation was above 12 per cent. The margin between CPI and WPI on food – the “retail margin” if you like — isn’t that big.
Overall, the WPI-CPI disconnect is looking absurd. WPI is below six per cent, while CPI is at 10.4 per cent. If this gap is genuine, bumper profits are being made by industrialists and middlemen who exploit relatively cheap wholesale inputs and sell at much higher value-adds. This should show up in accelerated earnings growth. The early bird fourth quarter results suggests this certainly isn’t the case.
Both the CPI and the WPI cannot be right. Anecdotal evidence suggests the CPI is close to reality in its food inflation estimates, at the least. This sort of data error misleads both the market and policymakers.
The stockmarket consensus is focused on the preliminary point-to-point changes. If there are big errors in the data, the market cannot be blamed for going the wrong way. The data also influences the credit policy and this is even more serious.
The central bank will look at several indicators. The Index of Industrial Production is weakly up, with less than one per cent positive change. The WPI is down below six per cent, with core inflation down to roughly four per cent. The CPI is still at above 10 per cent. If the Reserve Bank of India (RBI) trusts WPI and IIP data, it must cut rates to stimulate the economy and it could gamble on big cuts, given a trend of falling inflation. If it trusts the CPI, it must be cautious. Of course, the central bank must also consider other factors like the Yen devaluation, the current account deficit, the fiscal deficit, etc. But it's one thing for RBI to weigh multiple variables. It is another thing to expect it to guess right about the dimension and direction of big errors.
Some details make the data look suspect. For example, WPI for January has been revised up sharply. It seems that inflation ran at 7.3 per cent in January and not 6.6 per cent as in the initial estimates. If Inflation was actually 7.3 per cent in January and 6.84 per cent in February, the drop in March was very steep.
The second detail frankly leads to disbelief. Food, which has a 13 per cent weight in WPI, ran at 7.6 per cent in the March WPI, down from 11 per cent in February. In the Consumer Price Index released last week (where food has near 50 per cent weight), food inflation was above 12 per cent. The margin between CPI and WPI on food – the “retail margin” if you like — isn’t that big.
Overall, the WPI-CPI disconnect is looking absurd. WPI is below six per cent, while CPI is at 10.4 per cent. If this gap is genuine, bumper profits are being made by industrialists and middlemen who exploit relatively cheap wholesale inputs and sell at much higher value-adds. This should show up in accelerated earnings growth. The early bird fourth quarter results suggests this certainly isn’t the case.
Both the CPI and the WPI cannot be right. Anecdotal evidence suggests the CPI is close to reality in its food inflation estimates, at the least. This sort of data error misleads both the market and policymakers.
The stockmarket consensus is focused on the preliminary point-to-point changes. If there are big errors in the data, the market cannot be blamed for going the wrong way. The data also influences the credit policy and this is even more serious.
The central bank will look at several indicators. The Index of Industrial Production is weakly up, with less than one per cent positive change. The WPI is down below six per cent, with core inflation down to roughly four per cent. The CPI is still at above 10 per cent. If the Reserve Bank of India (RBI) trusts WPI and IIP data, it must cut rates to stimulate the economy and it could gamble on big cuts, given a trend of falling inflation. If it trusts the CPI, it must be cautious. Of course, the central bank must also consider other factors like the Yen devaluation, the current account deficit, the fiscal deficit, etc. But it's one thing for RBI to weigh multiple variables. It is another thing to expect it to guess right about the dimension and direction of big errors.
The author is a technical and equity analyst