Why WPI inflation will continue to play dead till at least early 2016

There is now little doubt that inflation as measured by the wholesale prices index (WPI) is indicating deflation rather than just disinflation of the temporary kind. Deflation is an actual fall in prices, while disinflation is merely a slowdown in the rate of inflation.

The August WPI number, which printed at 176.70, shows a negative rate of just under 5 percent, which means this is the 10th straight month in which wholesale inflation has been negative.

It is, of course, possible to argue that WPI now is only reflecting the base effect of higher inflation in the comparable period the year before. WPI peaked at 185.90 in August 2014, which is why the latest figure shows such a huge minus sign before it.

But there is little chance that WPI inflation will rise to even zero – at least in the foreseeable next few months. Right through September-December 2014, the WPI was above 178, and in September, October and November last year, it was well above 181. This will guarantee another three months of deflation, if not four.

Going forward, the signals are still negative on several fronts. It means WPI inflation is as good as dead till early 2016, if not later.

First, global oil prices show no signs of moving up, and Goldman Sachs has suggested that crude may even fall as low as $20 a barrel. With China slowing down, and Europe and Japan still to emerge from the woods, demand will remain low, and even Opec sees prices ruling weak well into 2016 . This means India is safe from imported inflation and will, in fact, benefit from cheap oil at least for another 6-9 months, if not more.

Second, the monsoon has been weaker than expected so far, but food stocks are more than adequate at over 50 million tonnes – when only 30 million tonnes are required to be stocked as operational and strategic reserves as on 1 October each year. So any spike in rice and wheat prices can be checked by releases of stocks in the open market. Also, the onset of winter brings down veggie prices – which should continue to help the downward drift in inflation.

Third, even though the US economy is growing well, with unemployment numbers falling to a new post-2008 low - due to which the US Federal Reserve may finally raise rates this week - the world economy is still sluggish as three growth engines have stalled – in Europe, Japan and China. With currencies still weak against the US dollar, Indian exports will tough to push up. When exports remain weak, it has an impact on domestic prices too, as installed manufacturing capacity will be enough to meet rising consumer demand. So there is no inflationary threat from capacity limitations.

Fourth, the gap between consumer and wholesale inflation – nearly 7 percent now – indicates that a lot of the output value is being retained with trade and factories themselves. This suggests that margins may show an improvement even as commodity and input costs keep falling. This is good for an investment pick-up later - and without inflationary consequences.

The only real worry will be the likely expansionary impact of OROP (one-rank-one-pension) deal for armymen, and the coming impact of the Seventh Pay Commission next year. But that worry is for later. Probably only in the second half of 2016.

Right now, there is little chance that inflation is about to rear its ugly head in India.

RBI Governor Raghuram Rajan has little reason to hold back on his rate cut this month. Perhaps he is holding his hand to see what Janet Yellen is upto at the US Fed later this week. The Fed meets on 17 September.