WPI falls to -2.06% on lower fuel prices but watch out for rise in food inflation - Firstpost

The steeper-than-expected fall in wholesale price index (WPI) inflation for February, the fourth consecutive monthly decline, is largely on account of a fall in fuel prices and decline in manufactured products inflation in the face of weak consumer demand.

According to the government data, the WPI inflation fell to -2.06 percent in February from -0.39 percent a month ago. The point not to be missed is that there isn’t any encouraging trend when it comes to food price inflation, which still stay high with a 7.74 percent growth, largely same as the previous month.

AFP

The trend in food inflation, a major contributor to the persistently high retail inflation, will have significant say in charting the Reserve Bank of India’s (RBI) policy stance in the approaching months.

Even the consumer price index (CPI) inflation, which is the key price indicator for the central bank, has been inching up in the recent months with a primary contributor to the rise being the food prices.

In February, the CPI rose to 5.37 percent from 5.19 percent in January, mainly due to higher food prices. Food and beverages constitute about 46 percent of the retail inflation basket.

Direction of food prices is critical since it tends to go up in summer, and the scene doesn’t look good with the unseasonal rains in February and March that might impact the crop output this year.

Taking a closer look at the WPI internals, fuel prices have played a major role in the February decline in fuel prices. The index for this group has fallen due to lower price of furnace oil (14 percent), aviation turbine fuel and bitumen (13 percent each), high speed diesel (6 percent), petrol (5 percent), kerosene (4 percent) and LPG (3 percent).

As per the data, rate of inflation in LPG, petrol and high speed diesel has been on a decline over the last six months. LPG inflation has declined steadily from 2.83 percent in September 2014 to -8.86 percent in February; petrol from -9.42 percent to 21.35 percent in February and high speed diesel from 10.10 percent to -16.62 percent. Such a sharp fall is duly attributed to the softening of crude prices internationally, which has evidently translated to domestic prices.

Persistently high food prices presumably rule out a rate cut by Raghuram Rajan in the 7 April monetary policy, after two surprise cuts amounting to 50 basis points (bps) so far this year. One bps is one hundredth of a percentage point.

A likely spike in food inflation is something the International Monetary Fund (IMF) too has pointed out as one of the major risk factors to inflation in India, with demand pressures arising out of high government spending being the other.

The RBI, entrusted with an inflation target of 4 percent by fiscal year 2017 under the new monetary policy framework, doesn’t have much control on the supply-side inflation arising out of falling output. This part is something, where, only the government can act.

If food prices play spoil sport in the coming months, Rajan’s job can, and will, become a lot more difficult.

(Data support by Kishor Kadam)