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Fuel prices drive CPI, WPI further apart

Recent months have seen core WPI, CPI inflations drift in the same direction, but their headline numbers diverging

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Divergent trends in fuel inflation in the wholesale price index (WPI) and consumer price index (CPI) inflations is driving them in different directions.

Analysing the figures of both inflations over the past few months, economists said while the core-indices of WPI and CPI were moving upwards, their fuel indices were showing opposite trends due to different weightage given to the item.

D K Srivastava, chief policy advisor, EY India, told DNA Money that the variation in the WPI and CPI was mainly driven by their fuel price curves.

"In the case of both WPI and CPI, if you look at core indices they are moving in the same direction, and that is upward. But food and fuel are actually going down in CPI. In WPI, food prices have eased, but fuel and basic metals prices are up. So the explanation has to come mainly because of fuel prices moving in opposite directions," he said.

The WPI inflation numbers for October show it rose to a four-month of 5.28%, primarily due to the upward movement of fuel and basic metals prices. The same month had seen CPI ease to 3.31%.

Aditi Nayar, vice-president, principal economist, Icra, said the uptick in last month's inflation "reflected the impact of the pass through of higher commodity prices and the rupee depreciation, whereas the disinflation in food prices had a much smaller impact on wholesale inflation than the CPI, given the difference in weights for food items in the two indices".

Even as she expressed concern over the core CPI and WPI inflations surging, she said recent "pullback" in the Indian rupee exchange rate against the US dollar and softening crude oil have come as a relief for inflation.

"While the uptick in both the core-CPI and core-WPI inflation in October 2018 warrants some caution, the recent pullback in the INR and crude oil prices has softened the risks to the inflation trajectory," said the Icra economist.

Nayar also felt that year-on-year (YoY) disinflation in primary food items for four months in a row was a "cause for concern".

"Primary food items recorded a YoY disinflation for the fourth month in a row, which is a cause for concern. The YoY disinflation in primary food items in October 2018 was driven by vegetables and protein items such as pulses, and egg, meat and fish. Whether the market prices for various crops move closer in line with the revised MSPs, would crucially impact the outlook for food inflation in the near term," she said in a statement issued by Icra.

Rishi Shah, economist, Centre for Digital Economy and Policy, believes the difference in CPI and WPI trajectory was because the latter captured international commodity price movements better than the former.

According to him, another reason for the divergence was because CPI includes services inflation and WPI didn't.

"WPI doesn't have any services. It is just primary and secondary goods. That is why these two need to be looked in isolation," said Shah

He is expecting WPI to ease due to softening crude prices, which would see rupee exchange rate also improve; "The expectation is that the WPI would move down from the current level while the CPI could move above the current level as effects of minimum support price kicks in. If you look at the monthly trend, they might move in different directions, but broadly, they are likely to move in the same direction".

Shah believes once the effect of minimum support price (MSP) kicks in, it will begin reflecting in the food inflations of WPI and CPI inflations. This is likely to push up both.

However, the Centre for Digital Economy and Policy economist does not see any major macro-economic concerns on pricing front.

EY's Srivastava also expects WPI to ease and move closer to CPI level with the easing to global crude prices.

"CPI will remain at this level or keep going down marginally. WPI is also likely to go down mainly because of fuel prices and exchange rate beginning to improve," he said.

The EY economists felt that CPI was in RBI's comfort zone and so the government did not need to make policy effort to reduce it further.

"It (CPI) is below (Reserve Bank of India's) average target of 4%; rather our monetary policy should focus more on crude prices," he said.

Srivastava expects the impact of MSP on inflation to play out around December but projects CPI to remain stable and WPI to decline.

Even Icra's Nayar forecasts WPI inflation to range between 4.5%-5% in the remainder of the second half of the current fiscal given the easing in the crude oil prices and the recent strengthening of the rupee. RBI's outlook for CPI or retail inflation, which it takes into consideration while reviewing its monetary policy, is pegged between 3.9%-4.5% for the second half of the current fiscal.

CLOSING THE GAP

  • Recent months have seen core WPI, CPI inflations drift in the same direction, but their headline numbers diverging
     
  • Economists expect the gap between the two to close as global fuel prices ease and the effect of minimum support price kicks in
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