Why gap between WPI and CPI based inflation is digressing

While the retail inflation as measured by the Consumer Price Index (CPI) touched a 16 month high at 4.62% in October, the wholesale price inflation measured by the Wholesale Price Index (WPI) declined to a 40 month low of 0.16%, at the verge of entering the negative territory. The gap between the two is currently the widest in two years.

Since January 2014, the highest gap between the two inflation gauges was witnessed in September 2015. During that month, CPI stood at 4.4% and WPI at -5.6%, meaning a divergence of a huge 10% points.

Wholesale price deflation would signal that producers lack pricing power and may be offering discounts at a time consumer expenditure has dropped to an 18 quarter low in the April-June period. For example, automakers offered heavy discounts during the festive season to break the trend of falling sales. Index of Industrial Productions (IIP) output contracted for the second consecutive month to 4.3% in September after 1.1% in August. This is worst performance in this series since its inception in April 2012. Production of both consumer durables and consumer non-durables contracted during the month.

CPI and WPI are two different sets of indicators with varied compositions. Manufactured items have the highest weight of 64.23% in WPI, while fuel and primary articles have 13.15% and 22.62% weight, respectively. On the other hand, food and beverages have the highest weight of 54.18% in CPI, while services sectors such as health, education and amusement have a combined weight of 27.26%. So the supply shortage of onions and tomatoes due to floods and unseasonal rains has a disproportionate impact on the overall retail inflation than wholesale price inflation. On the other hand, a spike in crude oil prices or rise in other commodity prices would drive WPI based inflation up faster than the CPI based inflation.

However, retail food inflation often mimics the wholesale food inflation as the price rises are first reflected in the wholesale market than in the retail market. In October, retail food inflation quickened to 7.89% following similar print in wholesale price inflation at 9.80%.

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Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 12 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

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