I read bunches of people starting to celebrate the zero% inflation rate on the WPI. Same with the newspapers today. But wait up, a zero inflation rate on the WPI really isn’t necessarily that good. Before you want to shoot me down for saying this, lets step back a bit and understand what the zero inflation rate actually means. Here are some points to consider:
- The previous government pulled out a bunch of items (from the basket) because they were pushing the inflation rate.
- There has been a significant drop in the price of petroleum based fuel, and a slow down of manufacturing
- Consumer price index is not directly dependent on the WPI. It is related for sure.Otherwise, you would see a proportional drop in CPI as well.
How does the WPI get formed? Its an index of 676 commodities categorized under the groups of Primary Articles (20.12% weight), Fuel and Power (14.91% weight) and Manufactured products (64.97% weight).
The September 2014 WPI report tells us that:
- In primary, food articles dropped by 0.4%, non-food articles by 0.7% and minerals by 5.9%. BTW, minerals includes crude and that dropped 12%
- Fuel and power dropped by 5.4%. This component of index is based completely on petroleum based fuels.
- Manufactured products dropped by 0.3%.
What does the above mean? There are two clear large components of this drop.
- Crude and petroleum based fuels have caused a fall.
- The drop of 0.3% in manufactured products is the biggest mover. 0.3% of 64.97% is a whopping 19.5%. A drop in price of manufactured goods usually means supply is outstripping demand.
Lower inflation rate may sometimes imply a lower lending rate. However, you would appreciate that a lower lending rate isn’t always good for the economy and nor is a super low inflation rate.
Yesterday’s RBI report (data for October) tells us:
- CPI has fallen a percent from 6.5% to 5.5%
- In WPI – Primary articles have dropped 0.4% to 1.8%. Fuel and power have dropped to a 0.4% from 1.3% and manufactured goods have dropped from 2.8% to 2.4%. So a 0.4% drop here equals a 26% drop overall in the WPI.
One should also note that our:
- Imports have dropped from 25.5% rate to a 3.6% rate. Some of that could be because of the falling Rupee as well.
- and our exports rate has gone to a -5%.
There is much more than the zero % WPI rate than meets the eye as far as our economy numbers go. Just one data point does not show the health of the economy. A 26% drop in WPI due to slow down in manufacturing, a -5% growth in exports does not sound that nice, does it?