22nd October 2020

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WPI fell to a level of 4.5 years in May

Wholesale market prices fell to a low level of 4.5 years in May, registering deflation of 3.21%, due to a sharp drop in fuels and energy products, even when food becomes expensive. The wholesale price index (WPI) reached its lowest level since November 2015, when deflation was 3.7%.

 “The annual rate of inflation, based on monthly WPI, stood at (-3.21 per cent) (provisional) for the month of May, 2020 as compared to 2.79 per cent during the corresponding month of the previous year”

the Commerce and Industry Ministry said in a statement on Monday.

However, food inflation in May was 1.13%, compared to 2.55% in April. WPI inflation for pulses held at double digits at 11.91%, compared to 12.31% in April.

In the case of the potato, inflation reached 52.25%, despite the fact that vegetables experienced a deflation of 12.48% in May. Inflation for protein-rich products like eggs, meat, and fish was 1.94% in May.

Data collected by the government at the retail level, which was released last week, showed an annual increase in food inflation to 9.28% in May, driven by legumes, meat and fish, Oils and fats.

In the fuel and electricity basket, deflation stood at 19.83% in May, compared to 10.12% the previous month. Manufactured goods also experienced deflation of 0.42% during the month.

According to data released by the Department of Trade and Industry, the deflation of the wholesale price index (WPI) for primary items was 0.79% in April, compared with inflation of 3.72% in March. The fuel and energy basket posted deflation of 10.12% in April, compared to 1.76% the previous month.

The price movement of these WPI subgroups / groups was calculated by taking only the prices of the items for which at least 25% of the quotes were declared by the selected manufacturing units.

The indices were compiled for only five manufacturing groups: food, beverage, chemical and chemical manufacturing, pharmaceuticals, medicinal and botanical chemicals, and base metals.

Prices for food manufacturing (-0.29%), pharmaceuticals, medicinal and botanical chemicals (-0.15%) and base metals (-0.84%) fell temporarily, while that prices for chemicals and chemicals (0.86%)) and beverages (0.24%) temporarily increased in April compared to the previous month.

The ministry said the food index consisting of “food” in the primary product group and “food” in the manufactured group had temporarily increased from 146.1 in March 2020 to 146.6 in April 2020.

The inflation rate based on the WPI food index fell from 5.49% in March 2020 to 3.60% in April 2020. In March, wholesale price inflation decreased to a four-month low according to an official launch of 1%, against 2.26% in February. Due to the sharp drop in the prices of food and petroleum products, demand slowed down.

Earlier this week, the National Statistical Office (NSO) also postponed the release of inflation based on the Consumer Price Index or April, saying that the national foreclosure prevented authorities from collecting data. in prices in various centers.

The Reserve Bank of India (RBI) takes retail inflation into account when developing its monetary policy. The RBI said last month that its inflation outlook looks bleak, and that the risks surrounding the inflation bill are balanced. With the decrease in food prices, the sharp drop in oil prices and the normal monsoon, RBI expects inflation for the current fiscal year to be around 3.6-3.8%.

The first reading of wholesale price index (WPI) inflation since the close shows a bleak picture. The WPI measures prices at producer level and is a good indicator of the pricing power of companies. With -3.21%, this is the worst impression in about five years and well below the -1.2% expected by economists.

The manufactured goods index fell 0.42%. Details of the subgroup show that the Indians mainly purchased the essentials during the lockdown of the 70 days and even when they gradually relaxed from April Food, pharmaceutical and tobacco processing posted inflation, albeit lower than before. Textiles, leather and other non-essential items slipped into deflation.

The main contributor to WPI deflation was crude oil, petroleum and natural gas, which fell 46.21% as a result of lower world prices. By extension, fuel and energy prices also fell for a year. Food, which has a high weight in the index, showed an impression of inflation of 1.13%.

Historically, the inflation trajectories of wholesalers and retailers have diverged. Ergo, WPI deflation does not necessarily translate to retail deflation. In 2014-2015, the WPI showed deflation, but the Consumer Price Index (CPI) indicated inflation.

They show that wholesale deflation does not necessarily translate into retail deflation. It is true that the WPI is no longer the nominal anchor of monetary policy, since the Central Bank adopted the CPI in 2014. However, with the IPC data difficult to obtain, the IPM data may give early warnings for the policy formulation.

What is deflation?

  • Deflation occurs when overall price levels in a country fall, a difference from inflation when prices rise.
  • Deflation can be caused by an increase in productivity, a decrease in general demand or a decrease in the volume of credit in the economy.
  • Most of the time, deflation is an unequivocally positive trend for the economy, but it can also change under certain conditions at the same time as a contraction of the economy.
  • In an economy dominated by debt-driven asset price bubbles, deflation can lead to a temporary financial crisis and a period of speculative liquidation of investments called debt deflation.
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