Typically, when inflation shows a decline, it should be seen as happy news for consumers as it indicates more value for money. But, when inflation falls steeply and continues to fall, finally exploring the deflationary zone, there is a reason to worry. It indicates that there is something seriously wrong in the economy—the pricing power of companies is collapsing and demand pressure is beginning to take dominance. Are we at that stage now?
For the first time in more than three years, the wholesale price inflation (WPI) is sniffing the negative terrain.
In September, the WPI print came at 0.33 percent. The central bank doesn’t formally track the WPI inflation for policy purposes now; it looks at CPI inflation. But, collapsing WPI inflation means demand pressures are beginning to hit the economy hard and will put considerable pressure on the monetary policy committee/RBI to push down rates further. But that is unlikely to be of much help.
A series of five rate cuts that add up to 135 basis points cumulatively, hasn’t really helped the economy since banks have been hesitant to pass on the lower rates to customers.
Wholesale price inflation nearing zero means companies are beginning to lose pricing power and deflationary fears are looming over the economy.
The core WPI, that excludes the volatile food component, has been recorded at a negative 1.08 percent in September as against a contraction of 0.40 percent in the preceding month and 4.76 percent in the year-ago period.
WPI on manufactured items stood at negative 0.42 percent in September, further down from zero a month ago. In other words, manufactured items are looking at deflationary fears now.
WPI inflation is approaching the zero level at a time industrial production has slowed to a 7-year low.
The IIP contracted by 1.1 percent in August with a broad-based decline across sectors and in particular manufacturing sector (negative 1.2 percent), and capital goods segments (negative 21 percent). The significant fall in capital goods indicates the extremely weak state of investment activity. Consumer durables contracted by 9.1 percent and infrastructure/construction sector contracted by 4.5 percent.
The poor IIP numbers were expected post-August core sector number, which contracted for the first time in more than four years at negative 0.5 percent. What is core sector growth? This is the growth across eight key infrastructure sectors in the economy. These are electricity, steel, refinery products, crude oil, coal, cement, natural gas and fertilisers.
The data comes monthly and comprise nearly 40 percent of the weight of the items included in the Index of Industrial Production (IIP).
The core sector registered poor performance in August with the coal output logging (negative 8.6 percent) degrowth. Similarly, crude oil (negative 5.4 percent), natural gas (negative 3.9 percent), cement (negative 4.9 percent) and electricity (negative 2.9 percent) contracted. Three outliers were refinery products that grew 2.6 percent, fertilizers 2.9 percent and steel 5 percent. The performance of these three sectors saved the index from a bigger fall.
All this indicates that the government must immediately boost infrastructure spending to revive demand and take measures to enhance the spending power and intent of the consumer. Monetary policy has been proved disappointingly ineffective to address the demand problem in the economy. That puts the ball back in government’s court.
(Data support by Kishor Kadam)
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Updated Date: Oct 14, 2019 13:52:33 IST