India Economics

Wholesale Prices (Jan.)

India Data Response
Written by Darren Aw

The RBI doesn’t put much weight on the wholesale price measure of inflation, but the pick-up in core WPI inflation supports our view that the room for further monetary easing has diminished.

Underlying price pressures are building

  • The RBI doesn’t put much weight on the wholesale price measure of inflation, but the pick-up in core WPI inflation supports our view that the room for further monetary easing has diminished.
  • Headline WPI inflation rose to a nine-month high of 3.1% y/y in January from 2.6% y/y in December, which was slightly above expectations. (Bloomberg median: 3.0%, CE estimate: 2.8%.) The breakdown showed that the increase was driven by a jump in fuel inflation. (See Table 1.) This added 0.6%-pts to the headline rate which more than offset a fall in food inflation.
  • 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 from -1.5% in December to -1.0% in January. (See Chart 1.)
  • Looking ahead, headline WPI inflation is likely to fall this month. For a start, food inflation has eased further so far in February. Meanwhile, mounting fears of the coronavirus have caused oil prices to drop. So the recent surge in fuel inflation looks set to reverse. Nevertheless, given recent signs of stabilisation in economic activity, we think that core WPI inflation will rise further this month.
  • 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 both measures of inflation are painting a similar picture: underlying price pressures are strengthening. (For more, see our Data Response, “Consumer Prices (Jan.)”, 12th February.)
  • Further ahead, we think that underlying price pressures will rise in earnest over the coming quarters on the back of a gradual economic recovery. After all, policy remains very loose. And with headline CPI inflation likely to remain above the RBI’s 4% target for the rest of the year too, that will set the stage for modest rate hikes towards the end of the year.

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

Oct.

0.0

-1.8

9.8

-8.1

Nov.

0.6

-1.9

11.1

-7.3

Dec.

2.6

-1.5

13.2

-1.5

Jan.

3.1

-1.0

11.5

3.4

Sources: CEIC, Capital Economics


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

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