New WPI series suggests higher core inflation rate in past six months

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The Ministry of Commerce and Industry unveiled the revised Wholesale Price Index (WPI) on May 12 according to the 2011-12 base year. According to this release, WPI inflation for April is at 3.9 per cent, which is 144 basis points (bps) lower than the March inflation rate. The decline is mainly due to a 500 bps fall in fuel inflation and an over 200 bps decline in the inflation rate of primary articles. The new series records WPI inflation in FY17 at 1.7 per cent, 200 bps lower than the number according to the old (2004-05) series. 

The revised series has two key features: 

1. Excludes central excise duty from prices: The series removes the excise duty component from prices, bringing the measure closer to the producer price index and, at the same time, making it less responsive to changes in tax rates. Hereon, the consumer price index (CPI) will continue reflecting the impact of tax changes (including the impact of goods and services tax  or GST implementation on prices). In that sense, therefore, the gap between CPI and WPI can be a crude gauge of the impact of GST on prices.

2. More relevant to the current economic structure: The WPI series adopts a more recent base year and is now aligned with the gross domestic product (GDP) and index of industrial production (IIP) — also revised — series. This allows for a more meaningful comparison of the parameter, including the GDP deflator measure. This base year revision also allows items (such as natural gas, petroleum coke) to be included, the production share of has increased over time. This makes the index more relevant to the current structure of the economy. On the same line, weightages have undergone a change. 

So what does the new series suggest?

Inflation rate is lower, which could lead to an upward revision in past real GDP growth rates: The real GDP estimates (measured from the expenditure side) are computed by deflating the nominal GDP data. A lower WPI inflation rate could, therefore, pull up past real GDP growth rates for fiscal 2017, provided other factors influencing GDP remain unchanged in the revised data. Headline WPI inflation is lower by nearly 2 percentage points in fiscal 2017, and nearly one percentage points for preceding fiscals. 

The revised series shows a slightly sharper price-negative impact of demonetisation in the third quarter: Comparing quarterly data for WPI under the two series shows a sharper fall in WPI during the third quarter of FY17 according to the new series. WPI inflation fell to 0.2 per cent in the third quarter from one per cent in the previous quarter. In comparison, the old series saw WPI inflation fall 30 bps to 3.5 per cent. The divergence mainly arises from the primary articles and manufacturing sub-groups. 

The new index suggests core inflation could be higher than earlier perceived: The CRISIL Core Inflation Indicator (CCII) is computed by excluding base metals from manufacturing inflation. This measure is less volatile and believed to be a better indicator of underlying demand pressures in the economy compared with non-food manufacturing inflation, which includes the base metals index but excludes the food index. Therefore, CRISIL actively tracks the CCII. Index values for base metals data have not yet been made available. 
Source: Ministry of Industry and Commerce, CEIC, CRISIL Research

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