Wholesale inflation turns positive in April: Is this the end of deflation?

The Wholesale Price Inflation (WPI) is typically a non-event for most economists ever since the Reserve Bank of India (RBI) shifted its primary focus to the Consumer Price Index (CPI) as the key indicator for the purpose of monetary policy formulation. But, the April WPI numbers offers an interesting perspective that one cannot ignore. After remaining in negative for 17 consecutive months, the WPI turned positive in April to 0.34% in April as compared with negative 0.85% in the previous month and negative 2.43% in the year-ago period. It tells us two things. [caption id=“attachment_2783234” align=“alignleft” width=“380”]  Reuters[/caption] One, a rate cut on 7 June when RBI meets next to review the monetary policy is clearly ruled out, especially seen in the context of a spike in Consumer Price Index Inflation (CPI) to 5.4% from 4.8% in April. Clearly, the RBI wouldn’t want to take chances on cutting rates further when inflation is showing an upward trend. The RBI has so far cut its key policy rate by 150 bps since it started the rate easing cycle in 2015 January. It may opt to wait to see further price trends emerge. Two, the return of WPI into the positive territory is good news to the economy since it gives hopes that the period of steep fall in prices of manufactured products is over or broadly speaking the phase of deflation is over. The prolonged tepid phase in manufacturing segment has hurt the recovery process badly. But, economists warn that it is too early to conclude. “The April number gives one a hope that deflationary phase is over. But the trend has to sustain,” Madan Sabnavis, chief economist at Care rating agency said. Rupa Rege Nitsure of L&T Finance Holdings in an interview with CNBC TV18 said she is positive on the recovery trend. “If you look at the whole Index of Industrial Production (IIP), within that the basic goods category as well as the intermediate goods category, the uptick in production has been sustained for the last 4-5 months,” said Nitsure. “So, compared to the beginning of FY16, beginning of FY17 appears to be more optimistic and if we really get good monsoon rainfall in terms of both quantum and distribution, then we will see decent growth in the second half of the current financial year,” Nitsure said. Price worries The bad part is the spike in prices of food and vegetable items, especially that of potato prices. “The worrying thing is that past trends suggest whenever potato prices show an in-crease, they have remained sticky for a considerable period of time. If this is the case, then we are in tough times,” SBI economists said in a note. In April, the food inflation rose to 4.23 percent compared with 3.73 percent in March. Inflation in vegetables came in at 2.21 percent compared with negative 2.26 percent in April and that of pulses rose to 36.36 per cent from 34.45 percent. WPI internals show that the index of food articles grew by 2.0 percent to 263.8 from 258.6 in the previous month due to higher price of tea (11%), gram, poultry chicken and fruits & vegetables (7% each), beef & buffalo meat (6 %), barley, pork and bajra (4% each), ragi and arhar (3% each), moong, urad, maize and masur (2% each) and jowar (1%). Though uptick in food prices is normal during the peak summer, as noted in an earlier article , things can get worse if monsoon doesn’t do well this year. The CPI internals too show that the spike was primarily due to a jump in food price inflation from 5.2% to 6.3% and even a sharper upward spike in the vegetable inflation to 4.82% from 0.46%. The bottomline is this: The April WPI number breaking the deflationary trend is certainly a positive signal for the economy, if it sustains in the approaching months, but the spike in food and vegetable prices can put the central bank on a cautious mode.