Home >Markets >Mark To Market >For policymakers, WPI deflation is another warning of a recession

The first reading of the wholesale price index (WPI) inflation since the lockdown shows a grim picture. WPI measures prices at the producer level and is a good gauge of the pricing power of companies.

At a -3.21%, this is the worst print in roughly five years and far lower than the -1.2% expected by economists. To be sure, the deflation at the producer level was anticipated. But the subgroups in WPI shows some segments saw steep price cuts, probably to shed inventory, as the lockdown was eased in May. The index for manufactured products fell 0.42%.

Details of subgroups show Indians mostly shopped for essentials during the 70-day lockdown and even when it was progressively relaxed from April. Food processing, pharmaceuticals and tobacco products showed inflation, though lower than before. Textiles, leather and other non-essential items slipped into deflation.

Early Warnings
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Early Warnings

The biggest contributor to WPI deflation was crude, petroleum and natural gas, which showed a fall of 46.21%, a fallout of the crash in global prices. By extension, fuel and power prices, too, fell from a year ago. Food, which has a high weightage in the index, showed an inflation print of 1.13%.

Does this mean Indians would get deep discounts once they restart discretionary spending? Historically, wholesale and retail inflation trajectories have diverged. Ergo, WPI deflation may not necessarily translate into deflation at the retail level. In 2014-15, WPI showed deflation, but the consumer price index (CPI) indicated inflation.

As the lockdown had also made data collection a challenge for ministries, the WPI release was suspended in April. The Central Statistical Organization (CSO) has not released the headline retail inflation print for two months now. Inflation at subgroup levels has been made public.

What they show is that deflation at the wholesale level may not necessarily translate into deflation at the retail level. Should policymakers then respond to WPI deflation at all?

To be sure, WPI has long stopped being the nominal anchor for monetary policy as the central bank adopted CPI in 2014. Nevertheless, with CPI data hard to come by, WPI data can give some early warnings for policymaking.

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