India Economics

Wholesale Prices (Dec.)

India Data Response
Written by Darren Aw

The RBI doesn’t put much weight on the wholesale price measure of inflation, but the fact that it accelerated to a seven-month high in December nevertheless supports our view that the rate-cutting cycle is now at an end.

Headline WPI jumps to highest in seven months

  • The RBI doesn’t put much weight on the wholesale price measure of inflation, but the fact that it accelerated to a seven-month high in December nevertheless supports our view that the rate-cutting cycle is now at an end.
  • The surge in headline WPI inflation to a seven-month high of 2.6% y/y in December from 0.6% y/y in November was slightly above expectations. (Bloomberg median: 2.4%, CE estimate: 2.5%.) The breakdown showed that the increase was broad based but primarily driven by a jump in fuel inflation. (See Table 1.) This contributed 0.8%-pts to the rise in the headline rate.
  • Arguably more important, non-food manufactured product price inflation (our proxy for core WPI inflation, which we think gives a better indication of underlying price pressures) rose for the first time in 15 months to -1.5% from -1.9%. (See Chart 1.)
  • Most signs suggest that headline WPI inflation will rise further over the coming months. For a start, weekly data imply that food inflation has remained high so far in January. And if we are right in expecting oil prices to rise further this year, fuel inflation should accelerate as well. Meanwhile, the recent pick-up in activity indicators paint a slightly more upbeat picture for domestic demand and we suspect that underlying price pressures will soon strengthen in earnest.
  • The WPI measure of inflation is less important for policymaking than CPI inflation, which includes a wider range of goods and services and is easier for international comparisons. But the jump in the headline rate is difficult to ignore. And with consumer price inflation now at a five-year high, we think that the easing cycle is now over. (For more, see our Data Response, “Consumer Prices (Dec.)”, 13th January.) Further ahead, we think that strengthening underlying price pressures will prompt the RBI to switch to tightening mode much sooner than most are expecting, perhaps by the end of 2020.

Chart 1: Wholesale Prices (% y/y)

Sources: CEIC, Capital Economics

Table 1: Wholesale Prices

Headline
% y/y

Core
% y/y

Food
% y/y

Energy
% y/y

Sep.

0.3

-1.2

7.5

-6.7

Oct.

0.2

-1.7

9.8

-8.3

Nov.

0.6

-1.9

11.1

-7.3

Dec.

2.6

-1.5

13.2

-1.5

Sources: CEIC, Capital Economics


Darren Aw, Asia Economist, +65 6595 5193, darren.aw@capitaleconomics.com