While the CPI is still growing at 5-5.5 per cent, the WPI inflation is negative. In June, the headline inflation declined 2.4 per cent, a negative reading for the eighth month in a row. This is the longest streak of drop in wholesale price index, in recent history.
The divergence between WPI and CPI is confusing observers. While a drop in WPI builds a case for a rate cut by the central bank, the still high CPI inflation negates this view.
One reason for the divergence could be the disinflation in commodity prices in the global market, says Madan Sabnavis, chief economist, CARE. The Reuters CRB commodity index, which tracks prices of 19 commodities, hit its lowest since May 2003 recently. WPI, largely being a barometer of prices of manufactured products and fuel, as a result, has nosedived.
Manufactured products, which include machinery, chemicals and metals, are given a weight of 64.97 per cent in the index and fuel (and power) about 14.9 per cent.
Food, where inflation hurts consumers directly, has a weight of only 14.3 per cent in WPI (while in CPI, food accounts for a little over 45 per cent).
So, increase in prices of food articles hasn’t impacted WPI significantly. On the other hand, a sharp correction in the price of fuel (down 10 per cent) and some manufactured items, such as sugar, cotton textiles and base metals that hold a higher weightage, has pushed the index down.
One other explanation for the divergence is that CPI takes into account the inflation in services — including education and healthcare. Healthcare services are given a weight of 5.89 per cent, education about 4.5 per cent and recreation 1.68 per cent. So, the service price inflation impacts CPI. In June, the inflation in CPI Education index was 7.23 per cent and the inflation in healthcare services cost was 5.6 per cent. Also, CPI and WPI are constructed on different bases. While the CPI currently takes 2012 prices as the base, WPI uses 2004-05 as base year.
The variance between WPI and CPI, however, is not a recent phenomenon. In a speech delivered in 2010, the RBI Executive Director, Deepak Mohanty, said the gap between the two indices accentuated since early 2008. But, what is worrying is that the divergence has widened further in recent times. In June, there was a 7.8-percentage-point gap between the two indices, up from an average 2.8 percentage points in 2014. While lower commodity prices have dragged WPI inflation, the retail prices of manufactured goods could still be high due to bottlenecks in the supply chain infrastructure, say economists. It could also be because manufacturers haven’t passed on the benefit of lower input costs to consumers. Lower input costs have helped operating margins of companies in the June quarter. For the 550 companies that had announced the June quarter results up to August 3, operating margins improved by 200 basis points to 18.1 per cent sequentially.
Does anyone care? But deflation in the WPI is not bothering the central bank. After using the WPI as an indicator to set its monetary policy over the years, the RBI shifted to CPI in 2014, following the Urjit Committee recommendations.
The central bank believed that the CPI is a better reflection of the cost of living and inflation expectations of people. While that may be true, the CPI too fails to show the true state of affairs as far as the aam aadmi ’s household budget goes.