Consumer And Wholesale Inflation Fall Sharply In April

Price pressures cooled significantly in the month of April, with both retail and wholesale inflation falling. Wholesale inflation for April was measured using a new base year, a revised basket of goods and a changed methodology which is expected to make the index a better measure of producer prices in the economy.

Consumer price inflation fell to 2.99 percent in April compared to 3.89 percent in March. Price indices for vegetables and pulses fell sharply compared to a year, leading to a fall in the headline inflation rate. Headline retail inflation is now well below the Reserve Bank of India’s medium term target of 4 percent.

• Food and beverage inflation fell to 1.21 percent in April compared to 2.5 percent in March
• Fuel and lighting inflation rose to 6.13 percent in April compared to 5.5 percent in March
• Housing inflation was at 4.86 percent in April compared to 4.96 in March

Wholesale Index Mirrors Fall In Retail Inflation

After bouts of divergence, the month of April saw wholesale inflation fall in tandem with retail inflation.

Under the new series, wholesale price inflation stood at 3.85 percent in April, compared to 5.29 percent in March. Under the old series, wholesale inflation in March stood at 5.7 percent.

The sharp drop in inflation levels between March and April under the new series, could be partly because of negative inflation in the comparable month last year when wholesale inflation stood at (-)1.09 percent. Data for the previous month and the comparable month last year has been adjusted to the new series by the government’s statistical office for comparison purposes.

• Primary article inflation, based on wholesale index, stood at 3.85 percent
• Fuel and power inflation stood at 18.52 percent
• Manufactured goods inflation stood at 2.66 percent

On a month-on-month basis, fuel and power inflation declines 1.9 percent while primary article inflation rose 0.4 percent. Manufactured goods inflation remained steady.

The New Wholesale Inflation Index

In keeping with its practice to revise base years periodically and change the basket of goods included in each index, the government on Friday released the new series of the wholesale price index.

The index will now hold a wider set of goods. The number of items has been increased from 676 to 697, said the government in a press release. In all, 199 new items have been added and 146 old items have been dropped.

Under the new series of WPI, prices used for compilation do not include indirect taxes. This has been done to remove the impact  of fiscal policy and is in keeping with international practice.

There is also a key change in the statistical method used for compilation of the index. “Item level aggregates for new WPI are compiled using Geometric Mean (GM) following international best practice...,” said the government in its press release.

The move towards using geometric mean could reduce the intensity of rise in price levels, said Soumyajit Niyogi, associate director at India Ratings & Research.

Relief For Bond Markets

A fall in inflation levels, both retail and wholesale, could come as a relief for bond market traders, who have been fearing tighter monetary policy from the RBI as it moves towards its 4 percent medium term inflation target. In February, the RBI moved its monetary policy stance from accomodative to neutral, suggesting that the next rate move could be in either direction.

With inflation falling, the likelihood of a rate hike in the near to medium term remains limited.

“With the new 10 year benchmark bond in place, the sharp moderation in CPI is likely to boost sentiments in the bond markets in near term. The effect will be more pronounced in the medium to long term end of the curve,” Niyogi added.

The new 10-year benchmark bond was auctioned on Friday at a cut-off yield of 6.79 percent.