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Posted by: Deepa Vasudevan on Thu, Feb 19th, 2015

Interpreting Negative WPI Inflation

The Wholesale Price Index (WPI) inflation for January 2015 was minus 0.39%. The implication is that wholesale prices have fallen compared to January 2014. This is only the second phase of negative inflation, or deflation, in the history of this index (with 2004-05 base year)[1] (Pic 1).  For an economy that has struggled to control inflation for the past few years, this is an important achievement. 


Pic 1 WPI Inflation: All Commodities Vs.Fuel and Power 

 WPI Inflation: All Commodities Vs.Fuel and Power

Source: CSO


To understand how inflation became negative, take a look at the inflation in the Fuel and Power component of WPI (Pic 1). Key Mineral Oils such as petrol, LPG, diesel, kerosene and aviation fuel have a combined 9.3% weight in WPI, but their impact on overall inflation is far higher[2]. A fuel price shock- in the upward or downward direction- can shift the direction of inflation significantly. When crude prices fell sharply after the 2008 global crisis, the government reduced administered prices of petroleum products, and WPI inflation turned negative. A similar drop in crude prices since June 2014- culminating in a 10.7% decline in the fuel sub-index in January- was crucial in pushing inflation to negative levels.


Though inflation appears to have been subdued, RBI will be watching future price trends carefully. The reason is that food inflation- typically India’s biggest problem- has been rising steadily over the last two months. At 8%, the January 2015 food inflation number was close to the dreaded double digit inflation threshold, probably pushed up due to the combined impact of an unfavourable base effect[3] and below-normal monsoons (Pic 2).


At this point, the decline in international crude prices has compensated for the rise in food prices. But if crude prices were to rise to pre-2014 levels, inflation could increase once again.


Pic 2 Components of WPI Inflation

Components of WPI Inflation

Source: CSO


In theory, it is a good time to cut interest rates; assuming, of course, that a rate cut will spur investment and consumption and restore economic growth. That may or may not happen: domestic constraints such as reduced government spending, poor infrastructure, slow project clearances, and growing bank NPAs; and international developments such as Fed policy, oil prices, and recession in Europe and easing in Japan all have an impact on GDP growth. Low inflation and low interest rates are not sufficient to ensure robust economic health.

[1] When January 2015 WPI data was released, November 2014 inflation was revised downward from 0% to -0.17%. So there was a phase of negative inflation during November to January, with December showing a small positive inflation of 0.11%.

[2] Mineral oils is a sub-category within the Fuel and Power category, which has a 14.9% weight in WPI.

[3] Inflation is measured as the percentage change in the index value over the same month last year. If the base period has high inflation, current period inflation would appear to be relatively low. In November 2013 food inflation was at 19.7%; in comparison, food inflation for November 2014 came in at just 0.6%. In December 2013, it was 13.7%, so inflation for December 2014 was a bit higher at 5.2%. From January 2014, food inflation moderated to levels of 7% to 9%, so the base effect benefit wears off from January 2015.

Ajit Purohit on Mon, Feb 23rd, 2015 5:49:21 pm

Expecting RBI to see & to cut the rate accordingly.

krishna kishor tiwari on Sat, Feb 21st, 2015 10:27:03 am

After watching for a month more by RBI,rate cut is expected in near future i.e. by April15,to spur growth.International conditions are also favourable.

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