India\u2019s inflation based on WPI and CPI showed divergent trend for the year ended March\u201924 (FY24) but from different initial level. While CPI moved down to 4.85% in March\u201924 from a high of 7.4% in July\u201923, WPI moved up to 0.53% from a low of – 4.2% in June\u201923. The annual average for CPI works out to 5.4% against -0.7% for WPI. With the monetary tightening already done over 12 months ago, the continued high CPI inflation is a caue of concern. Here is a look at the movement of the inflation and its various components.<\/p>\n
Inflation is measured by two main indices – CPI (Consumer price Index) and WPI (Wholesale price Index). While CPI primarily measures the price movement of consumption goods & services, WPI measures price movement of all goods produced in the economy. while CPI inflation has come down to 5.4% in FY24 from 6.7% in FY23, it is significantly higher than the desired level of 4% (+\/- 2%). WPI, on the other hand, has recorded sharp disinflation from a peak of 12.9% in FY22 to 9.4% in FY23 and now in negative zone. (Annual inflation is calculated as average value of monthly index divided by average value during the previous year). On monthly basis, CPI remained largely elevated during the year, staying above 5% for seven months whereas WPI remained in the negative zone for the same period. WPI provided more comfort since it remained largely stable unlike FY23 when it moved sharply in the range of 16.6% and 1.3%. Even though MPC (Monetary Policy Committee) is guided by the movement of CPI, it is WPI which carries greater significance from macroeconomic perspective.<\/p>\n
WPI is divided into three groups – Primary articles (PA) with weightage of 23%, Fuel & Power (13%) and manufactured products (MP). MP has weight of 64% and is further divided into 20 subgroups, such as manufacture of textiles, chemicals, metals, machinery, transport vehicles etc. In all, WPI inflation is calculated based on the movement of about 700 different products including 90 food articles. The weightage is assigned broadly based on the share of items in GDP. MP inflation is broadly what could be called \u2018core inflation\u2019 and displays relatively stable trend unlike food & fuel. Inflation for MP group stood at -1.7% in FY24, down from 5.6% in FY23 and peak of 11.1% in FY22. Aggregate prices have declined due to softening of commodity prices which had run-up sharply due to Covid-induced supply chain disruption. Prices were significantly stable before that ranging from -1.8% to 3.6% between FY13 and FY21.<\/p>\n
In terms of large sectors, manufacture of chemicals & chemical products, metals and textiles have recorded decline of more than 5% during the year. These three sectors had also recorded total price increase of over 20% during FY22 and FY23 with metals rising a sharp 26% in FY22 alone. Metal prices inflation was driven by iron ore prices which rose by 53% in FY22 but declined by 27% in FY23 and has again increased marginally in FY24. An interesting aspect of inflation at subgroup level is significant degree of correlation between certain groups since output of one serve as input to another. For instance, manufacture of chemical products and textiles show a correlation of 88% and 85% with crude oil during FY14-24. This is so because crude oil and natural gas serve as feedstock for large number of these items and therefore, their prices vary accordingly. On the other hand, despite the sharp price increase in metals, sectors dependent on them such as machinery, transport vehicle, other transport vehicles have not shown similar price increase. Correlation of these sectors with metals ranges from 24-54%. This could be because metals form relatively small part of their total cost of production. Only electrical machinery shows a somewhat high correlation of 73% with metals.<\/p>\n
While metals, textiles, paper have shown maximum variance in their annual inflation over last ten years, motor vehicles, Pharma, apparel and machinery have shown remarkable stability with variance being less than 5% that of metals.<\/p>\n
The other component of WPI, Primary articles (PA) comprises of food articles, non-food articles and minerals. Non-food articles comprise of cotton, silk, oil seeds whereas minerals are iron ore, copper etc. Crude oil and natural gas are also part of PA. Broadly, PA are items grown or extracted from earth and processed before being used\/consumed. Fuel & Power comprises of items which are used as a source of fuel. So, coal, which is also extracted from earth but directly used as fuel is classified under this. Other items within fuel are electricity, petrol, kerosene, ATF etc.<\/p>\n
After two successive years of worryingly high inflation of 33% and 28%, Fuel & Power showed some relief, declining by 4.5%. Primary articles inflation has also been quite high at 10% in FY22 and FY23 but came down to 3.5% in FY24. An unfortunate characteristic of food and fuel inflation is their sharp volatility. Fuel inflation has ranged from -20% to 33% since FY14 whereas food inflation varied between -0.4% and 10.3%. The volatility makes the task of managing inflation that much tougher. Pulses had seen significant decline in its inflation since FY16, when it peaked at 35%, with increase in domestic production. However FY24 had been a challenging year with significant decline in production leading to sharp increase in its inflation to 15%.<\/p>\n
CPI index is divided into six broad groups – Food, Fuel & Light, Housing, Pan & Tobacco, Clothing & Footwear and Miscellaneous which includes health, education, transport etc. Food and Fuel, together, account for 53% of weightage in calculation and drive the movement of CPI. As in case of WPI, inflation for both these groups in CPI also shows similar trend. Except for these two, other groups have shown significantly lower inflation during the year. Even though CPI comprises of limited number of items and may appear to be a less onerous exercise, it is calculated separately for all states and union territories totalling 36 in number and for both rural and urban region.<\/p>\n
An interesting aspect of discussion around inflation is low correlation of just 32% between CPI and WPI. Average gap between the two has been 4.1% over last 12 years. This is because of high weights of volatile food & fuel group which makes CPI more unstable. While weights of these two groups is 53% in CPI, it is only 35% in WPI. While WPI gives a better indication of inflation trend of the economy as a whole, CPI is given more importance to minimize the impact of inflation on common people.<\/p>\n
To sum up, inflation genie, which had resurfaced during Covid, seems to be retreating although not rapidly enough in case of CPI. CPI, which stood at over 9.5% in FY13-FY14, came down to average of 4.2% during FY16-20 but has averaged almost 6% during FY21-FY24. Similarly, WPI averaged 6% in FY13-FY14, came down sharply to 1.4% during FY15-21, rose to over 11% in FY22-FY23 and has come down again in FY24. While fuel prices are somewhat controlled, food prices remain the Achilles heel for the government and policy makers.<\/p>\n","protected":false},"excerpt":{"rendered":"
India\u2019s inflation based on WPI and CPI showed divergent trend for the year ended March\u201924 (FY24) but from different initial level. While CPI moved down to 4.85% in March\u201924 from a high of 7.4% in July\u201923, WPI moved up to 0.53% from a low of – 4.2% in June\u201923. The annual average for CPI works […]<\/p>\n","protected":false},"author":8,"featured_media":19323,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[857],"tags":[],"class_list":["post-19322","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-economy","membership-content","access-restricted"],"yoast_head":"\n