Base effect, lower food prices ease India's August wholesale inflation

Base effect along with a fall in the cost of food and primary articles eased India's annual inflation rate based on wholesale prices to 4.53 percent in August from a 5.09 percent rise in July.

However, on a year-on-year (YoY) basis, the Wholesale Price Index (WPI) furnished by the Ministry of Commerce and Industry on Friday was still higher than 3.24 percent reported for the corresponding period of 2017.

"Build up inflation rate in the financial year so far was 3.18 percent compared to a build-up rate of 1.41 percent in the corresponding period of the previous year," the Ministry statement said here.

On a sequential basis, the expenses on primary articles, which constitute 22.62 percent of the WPI's total weight, slipped by (-) 0.15 percent, from an increase of 1.73 percent in July.

Similarly, the prices of food articles dipped. The category has a weight of 15.26 percent in the WPI index. It deflated by (-) 4.04 percent from a rise of (-) 2.16 percent.

Interestingly, the cost of fuel and power category, which commands a 13.15 percent weight, increased at a slower pace of 17.73 percent from a growth of 18.10 percent.

However, expenses on manufactured products registered a rise of 4.43 percent from 4.26 percent.

On a year-on-year (YoY) basis, onion prices declined by (-) 26.80 percent whereas potatoes became dearer by 71.89 percent.

In contrast, the overall vegetable prices in August declined by (-)20.18 percent, against a rise of 44.84 percent in the same month a year ago.

Further, the data revealed that wheat became dearer by 8.39 percent on a YoY basis while prices of pulses came down by (-) 14.26 percent, though paddy became expensive by 4.78 percent.

The prices of protein-based food items such as eggs, meat and fish went up marginally by 0.59 percent.

Fuel-wise, the price of high-speed diesel rose by 19.90 percent on a YoY basis, petrol by 16.30 percent and LPG by 46.80 percent.

On Wednesday, data furnished by the Central Statistics Office (CSO) showed that a decline in food prices had eased India's August retail inflation to 3.69 percent from 4.17 percent in July.

"The decline in the WPI inflation in August 2018 was largely in line with forecasts, driven primarily by the deepening disinflation in food items, particularly perishables like vegetables and fruits, as well as some easing in the inflation for primary non food articles, minerals, and fuels," said Aditi Nayar, Principal Economist, ICRA.

"However, core inflation hardened to a series high 5 percent in August 2018 from 4.8 percent in July 2018, a signal that firms with pricing power are beginning to transmit the weaker rupee and rising costs associated with industrial inputs such as fuels, to final prices."

According to Devendra Kumar Pant, Chief Economist, India Ratings and Research: "Despite high inflation in crude petroleum, and fuel and power inflation, strong base effect, continued deflation in food articles resulted in the sequential decline in WPI inflation."

"The core inflation in August 2018 at 5 percent suggests strong demand conditions in the economy. August 2018 core inflation is highest in 2011-12 base series. Apart from strong demand conditions, the weak currency is also playing its role."