What helped wholesale price inflation stay negative?
Pulses have been racing since January 2015, gathering pace in the subsequent months, as arhar dal rose to catch up with the already rising prices of urad dal. Onion prices have been on fire for the last four months. Yet, for the last 12 consecutive months, inflation measured by the wholesale price index (WPI) has been negative.
It is unlikely to remain negative for very long - and that is because of something the economists and statisticians call the base effect. The benefit of the base effect is about to come to an end in a month or two. So, even if there is no rise in the wholesale price index in the months ahead, inflation is set to become positive. Inflation measures the change in a price index, and in India, we usually measure the change on a year-on-year basis.
So what is the base effect? Through much of 2013 and 2014, prices of many commodities such as petroleum products and certain food item remained elevated. The combined effect of higher prices for these items translated into high price index reading. In the second half of 2014, petroleum prices began collapsing in the international market. As India imports more than 70 per cent of its crude oil requirement, that collapse benefitted India in form of lower cost of oil. That collapse was captured in the wholesale price index all through 2015, and led to its slide downwards to a level below the reading for the corresponding months of 2014.
The difference between the readings of the price index of 2014 and 2015 has been narrowing over the last few months - and that's why we say the base effect is diminishing. The wholesale price index for August 2015 was 176.5 and for October 2015 almost identical at 176.7. Yet, wholesale price inflation for August was - 5.1 per cent compared to - 3.8 per cent for October. This is because the index reading for August 2014 at 185.9 was higher than the reading for October 2014 at 183.7. The wholesale price index reflects the wholesale prices of all the items that are used to construct that index.
The slide of the wholesale price index in the past one year, as mentioned earlier, was mostly a result of deflation or a steep fall in petroleum crude oil, which also dragged down prices of all petroleum products including diesel and petrol. Falling prices of commodities, particularly ferrous metals such as iron and steel, has also been responsible for the lower reading of the wholesale price index.
The fall in crude oil prices began showing up in WPI from August 2014. Initially, the declines were relatively smaller at 10-15 per cent, when compared on a year-on-year basis. The decline sharpened over the next few months and by December 2014, the index for crude oil was down more than 40 per cent. Along with petroleum crude, its distillates, more specifically petrol and diesel, too dragged down the WPI. Pre-tax prices of petrol saw downward correction from August 2014 and diesel from November 2014. The decline in petroleum prices were driven mostly by a glut in supply thanks to increased production in the United States. The slowing of the Chinese economy too contributed to some decline in the price as did the decision of the Organisation of Petroleum Exporting Countries (OPEC) not to cut production amid a glut.
The slowing of China also impacted prices of basic metals, more notably the price of ferrous metals such as iron and steel. The slide of these metals began in December 2014, falling more sharply since June 2015. That, too, helped the wholesale price index drift lower from year ago.
The manufacturing industries have had a significant role in keeping the WPI lower. Manufactured products together account for a lion's share of 65 per cent of the wholesale price index and the combined index has been negative since March 2015. Manufactured products benefitted from lower raw material and petroleum prices and that would have helped bring down their prices from a year ago.
Petroleum prices are likely to remain subdued, despite the attacks on Islamic State-controlled oil fields and refineries. Metal commodities too is expected to stay muted on slower growth in China. But an increase in prices of food items along with diminishing benefit of base effect will bring WPI inflation into the positive territory.
Some of the increase in WPI will also get manifested in the consumer price inflation (CPI), which anyway has remained positive all along. For that matter, rising retail prices of food items, has made consumer price index inch upwards in September and October, according to data published by the government. The consumer price index measures the cost of living of an average resident of the country while the wholesale price index is a key measure of the level of inflation in the economy. Their divergent trend in the past few months essentially means that a consumer's cost of living has risen not just because of higher food prices but also higher cost of services - rents, education, medical care and transportation. And, not to forget higher taxes, particularly higher taxes on services and petroleum products.