WPI inflation up 2.03% on factory goods and fuel, room for rate cut shrinks

By Administrator_India

Capital Sands

Unlike its retail price counterpart, the wholesale price index (WPI)-based inflation rate rose to 2.03 per cent in January from 1.22 per cent in the previous month as fuel and non-food manufactured products faced price pressures. Economists feel there is no further room for rate cuts by the monetary policy committee of the Reserve Bank of India in the current cycle.

The consumer price index (CPI)-based inflation rate, on the other hand, fell to a 16-month low of 4.06 per cent from 4.59 per cent over this period. While the directions of CPI and WPI inflation rates look divergent, a deeper analysis showed that items within each of them moved more or less in tandem.

The WPI inflation rose because it consists of mainly manufactured items which have a weight 64.23 per cent. Besides, fuel and power have 13.15 per cent weight. Both these categories surged in inflation or decreased in the deflation rates. Core inflation rate (that on manufactured items sans processed food products) rose to a 27-month high 5.1 per cent in January.

Manufactured items saw inflation rate rising to 5.13 per cent in January from 4.24 per cent the previous month. For instance the inflation rate in base metals increased to 14.46 per cent from 11.49 per cent in this period. Similarly, the inflation rate in mild steel and semi-finished steel rose to 10.7 per cent from 9.93 per cent.

Also rubber and plastic products saw the rate of price rise jumping to 7.31 per cent from 4.62 per cent.

However, the inflation rate in pharma and related products fell to 0.46 per cent from 2.58 per cent as the fear of Covid waned.

Among fuel and power, inflation rate in liquefied petroleum gas (LPG) rose to 2.68 per cent from 2.15 per cent. Petrol and diesel saw the deflation rate coming down to 10.29 per cent and 13.65 per cent from 12.94 per cent and 15.2 per cent respectively. In CPI as well, fuel and light inflation rose to 3.87 per cent from 2.99 per cent.

Food items in WPI continued to witness deflation with the rates rising. The rate rose to 2.8 per cent from 1.11 per cent. Veggies and cereals were in deflation in January. In CPI too, food inflation moved down to just 1.89 per cent in January from 3.41 per cent in the previous month

Aditi Nayar, principal economist at ICRA, now expected the WPI inflation rate to average 5-5.5 per cent in 2021-22, unless the available vaccines turn out to be ineffective against new Covid-19 variants, causing commodity prices, consumer confidence and business sentiment to plunge.

“We expect the CPI inflation rate to have bottomed out in January 2021, with large upticks expected in the next two prints. This, combined with the anticipated hardening in the core-WPI inflation, reaffirms our view that there is no room for further rate cuts in this cycle,” Nayar said.

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