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Section : Economics

Inflation is dying: WPI hits zero percent in November and you read it here first
We have to thank falling global oil prices and slowing manufacturing – and Raghuram Rajan’s high interest rate regime – for this development.

By R Jagannathan

Readers of Firstpost’s Business section will not be surprised to learn that inflation as measured by the Wholesale Prices Index (WPI) has hit zero in November 2014.



According to the latest data released today (15 December), WPI has hit zero – which means prices this November are almost the same as last November – marking a key milestone in the killing of the inflation monster. We have to thank falling global oil prices and slowing manufacturing – and Raghuram Rajan’s high interest rate regime – for this development.

This is exactly what this writer had predicted two months ago (read here), based on speculation about the WPI’s base effect peaking in November and global oil prices being staying benign and vegetable prices remain easy this winter.

With the Consumer Prices Index (CPI) for November already below 5 percent (it clocked in at 4.38 percent), the monetary policy target set for achievement in January 2016 (6 percent) has essentially been over-achieved more than a year in advance, thanks to good luck and some degree of good policy-making (more of the former).

However, there is a reason why Rajan is still sitting on his hands. The base effect (where the current year’s index is higher or lower depending on whether the index base of last year was higher or lower) will dissipate from December 2015. Rajan is hesitating to declare inflation dead because he wants to see how both the CPI and WPI fare once the base effect disappears in December, January and so on.

The November WPI hit zero based on negative growth (-0.98 percent) in primary articles, due mainly to the fall in fuel and power (-4.91 percent), with petrol leading the decline by -9.96 percent and diesel by -2.97 percent. Food prices rose by a piffling 0.63 percent.

To be sure, the decline would have been sharper, with WPI possibly turning negative in November, if the government had not raised taxes on fuel to reduce its fiscal deficit. The tax increase was thus beautifully timed and a good example of counter-factual policy-making that does not do inflationary damage.

In November, manufacturing inflation was still at 2.04 percent – which means that core inflation (which excludes food and fuel, including the food products part of manufacturing) is still positive. Manufacturing accounts for nearly 65 percent of the total weight of the WPI. But even core inflation has fallen in November from 2.5 percent to 2.21 percent.

What this suggests is that inflation is being tamed, if not dead. We only need the confirmatory signals from December and January to know if it is going to lie low or rear its ugly head again.

With the world facing deflation rather than inflation (the US, Europe, Japan and China are all trying to boost inflation, but failing), the fall in global oil prices is actually pointing towards further deflation ahead – which the world may try to counter with more money printing and quantitative easing. Japan has already done it, China has cut interest rates, and Europe may follow suit in early 2015.

Only the US is talking the possibility of raising rates, but it’s some time in the distant future. It may hold its hand if the rest of the world is reflating to keep growth hopes afloat.

India is the lone country (barring a few smaller economies) still trying to fight inflationary demons rather than deflation. By early next year, we will probably be reflating by cutting rates.

The signals for a rate cut are slowly turning green all over.

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