India CPI Inflation versus WPI Inflation
Compare Consumer Price Index (CPI) and Wholesale Price Index (WPI):
----------------------
Read more: Fed Tapering is Postponed
(please click on the chart for a better view)
Inflation numbers in India have been elevated for more than a year. In the last one year, CPI inflation registered a high of 7.6 per cent in October 2020, before cooling off to 5.6 per cent in July 2021.
Similar to CPI Inflation, WPI inflation too has been rising in recent months. It reached a peak of 12.9 per cent in June 2021, before falling slightly to 12.1 per cent last month.
-----------------------
Read more:
Indian savers and negative real interest rates 05Aug2021
Why worry about negative interest rates 14Jul2020
------------------------
As shown in the WPI inflation chart, manufacturers in India seemed to have attained some pricing power since the beginning of 2021. This pricing power is reflected in the steep rise in WPI in recent months. Sectors, like, metals and chemicals have gained pricing power which increased their profit pools hugely in recent quarters.
As described in the comparison chart above, there are slight differences between the weights (basket of goods and services) of CPI and WPI. CPI inflation numbers are more relevant to households and corporates. Prior to April 2014, India's central bank Reserve Bank of India (RBI) used WPI inflation as a nominal anchor for setting its monetary policy.
But from April 2014, RBI started using new CPI (combined) inflation as a key measure of its monetary policy. RBI adopted this inflation rate as the nominal anchor as part of the Urjit Patel Committee Report of January 2014.
CPI inflation closely reflects the cost of living for households. It also impacts inflationary expectations in the economy.
Even though RBI's monetary policy moved to Flexible Inflation Targeting (FIT) regime effective June 2016, RBI has failed to control inflationary expectations in India with the key measure of its monetary policy CPI inflation staying persistently above the upper bound (6 per cent) of its inflation target.
It may be mentioned that RBI signed an agreement called Monetary Policy Framework (MPF) with the Ministry of Finance, Government of India on February 20, 2015 whereby RBI was obligated to ensure that CPI inflation remained in the range of 2 to 6 per cent.
As the CPI inflation has been persistently above its outer range of 6 per cent (in 13 out of 20 months since December 2019), it is hoped that RBI will soon get a grip on the primary objective of its monetary policy, that is, anchoring inflationary expectations within the target range of 2 to 6 per cent.
- - -
References:
Flexible Inflation Targeting - RBI report dated 25Nov2016
CPI inflation - Trading Economics
WPI inflation - TE
Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial products discussed, if any.
Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.
CFA Charter credentials - CFA Member Profile
CFA Badge
He blogs at:
https://ramakrishnavadlamudi.blogspot.com/
Twitter @vrk100
No comments:
Post a Comment