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Cheaper fuel leads to WPI deflation in Jan

Wholesale prices declined 0.39 per cent annually in January, contracting for the second time in three months, because of falling fuel prices. Food prices, however, rose during the month. December saw inflation at 0.11 per cent.

Official data released on Monday revised the November Wholesale Price Index (WPI) to show deflation at 0.17 per cent, against provisional estimates of flat prices earlier. Deflation is a general fall in prices, while inflation is a general rise. WPI fell to a five and a half year low in January; inflation in the month a year ago was 5.11 per cent. Thus, there is hardly any base effect. In June 2009, prices fell 0.39 per cent year-on-year.

The data come a few days after another set of figures revealed retail inflation rose 5.11 per cent in January against 4.28 per cent in December. While the base year for the Consumer Price Index (CPI) was revised to 2012 from 2011 and weights of various items were changed according to the consumption expenditure survey of 2011-12 against 2004-05 used earlier, that for WPI is yet to be revised from 2004-05.

The data seem to be sending contrasting signals to the Reserve Bank of India (RBI) largely because of the new weight assigned to food items — higher in CPI than in WPI. RBI, which largely bases its monetary stance  on CPI, refrained from cutting the repo rate (at which banks borrow from it) in its review earlier this month after a mid-policy reduction in January.  

Aditi Nayar, senior economist at Icra, said, “We do not expect this reading to significantly influence the timing or extent of subsequent repo rate cuts, given that CPI inflation is the nominal anchor.”  

YES Bank Chief Economist Shubhada Rao said RBI would make additional rate cuts on the basis of CPI inflation, subject  to commodity prices remaining  low.

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