Happy days? Retail inflation is falling with a thud; small signs of industrial recovery

The Index of Industrial Production (IIP) for September and Consumer Price Index (CPI) numbers for October, both released today, have brought happy tidings.

While IIP is up to 2.5 percent from August’s dismal 0.4 percent, the CPI has slid nearly a full percentage point to 5.52 percent in October from 6.46 percent in September. This is the second consecutive month in which the CPI is falling with a thud, with August CPI being as high as 7.73 percent. If this trend persists, retail inflation will be well within the Reserve Bank’s comfort zone of 6 percent by early next year, enabling a cut in interest rates in the first quarter of calendar 2015.[caption id=“attachment_108072” align=“alignleft” width=“380”]  A worker grinds a metal shaft metal used in water pumps at a manufacturing unit in Ahmedabad. Reuters[/caption]

However, while the fall in retail inflation has been fairly consistent these last few months barring a few blips, the same is not the case with the IIP. The rise in factory output will have to continue for some more months before one can claim a recovery.

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The sharp fall in retail inflation owes much to two factors: falling fuel prices, with the government announcing two cuts in diesel and petrol prices last month, and the plateauing of food inflation. At 5.59 percent in October, food inflation is now roughly the same as overall retail inflation.

The CPI’s fall also indicates that the Wholesale Price Index (WPI) numbers, due on Friday, 14 November, may also show a sharp drop. In September, WPI printed at 2.38 percent, and given the high base of November last year, any drop of the same magnitude as CPI (if not more) will bring the WPI to 1 percent - or even lower. WPI inflation has peaked at 7.52 percent and CPI at 11.16 percent in November 2013.

The following are some of the key takeaways from the latest IIP and CPI numbers.

#1: Some zip is coming into the investment cycle, with capital goods output rising 11.6 percent in September, and 5.6 percent in the April-September period.

#2: In contrast, consumer confidence is yet to pick up, as is evident from the 4 percent fall in consumer goods growth, with consumer durables showing a fall of 11.3 percent in September (see the whole details here). Clearly, people are waiting to see if the economy revives before committing to buy more durables. Consumers are putting off purchases of automobiles and home electronics (TVs, etc) and companies seem to be delaying purchases of office equipment, including computers, et al. Growth in non-durables (your toothpaste, toiletries and food items) is flat at 1.5 percent.

#3: Food inflation is levelling off, with the only two items still in double-digits being milk and milk products (10.79 percent in October) and fruits (17.49 percent). Veggies are down by 1.45 percent.

#4: If fuel prices are cut again this month (November), as seems likely, given the fall in Brent crude prices, November inflation could be well and truly down - though this will reflect more in the WPI than in CPI. Fuel has a weight of 14.91 percent in the WPI and 9.49 percent in the CPI. This means the impact of fuel price cuts will impact WPI more than CPI.

#5: The base effect will help WPI inflation look even better in November. In November 2013 (on which inflation for this November will be calculated), the WPI number was 181.5. As against this, the WPI figure for September was 185, and if the October and November numbers show further drops due to falling fuel and food prices, WPI could hit a new low in November 2014.

Narendra Modi can claim he tamed inflation and revived growth in the coming elections even though a lot of it is due to fortuitous circumstances.