India inflation down, due to temporary reasons
in India is finally moderating to reasonable rates. Year after year, prices have been softening, but the current level had not been reached since before the 2008 crisis. The wholesale price index (WPI) was rising at an average rate of 9.5% YoY in 2011, 7.5% in 2012, 6.3% in 2013 and 5.0% YoY so far this year, even reaching 2.4% YoY in September, and its lowest level in more than a decade if we exclude an eight-month period during the global financial crisis.
The consumer price index (CPI), which captures better inflation at the consumer level, also fell substantially, to 6.5% YoY, down from 7.7% in August and 11.2% in November last year. The latest figure is an all-time low, although the series has only a three-year record. Both inflation indicators are at multi-year lows, suggesting that the economy’s long period of high prices may be coming to an end.
The decline in inflation was broadbased in September. Food prices grew at a rate close to decade lows according to WPI, increasing only 2.2% YoY, compared to 6.8% in July and double digits in 2013. CPI also showed a similar picture after it decelerated from 14.5% YoY in November 2013 to 7.6% in September, the lowest rate in nearly three years. An increase in monsoon rains has helped alleviate high food costs. High food prices have been a recurrent problem for the country due to major structural supply chain issues and constantly low farm productivity. Energy-related products also witnessed a sharp price deceleration. WPI showed fuel and power costs have grown by the least since 2009, standing near the deflationary zone. WPI energy inflation fell to 1.3% YoY in September, from 4.5% the previous month and 10.5% in May. CPI energy inflation was at a record low of 3.5% YoY in September.
Oil prices declined by 40% since June, reducing energy costs in India. India imports more than 70% of its oil, which is why the economy’s energy sector is highly dependent on global oil markets. The rupee has been roughly stable, which has helped the country take advantage of lower global oil prices. The declines in oil and food inflation come at a very important time for an economy that has been attempting to reign in price increases but, in the process, choked economic activity. Core inflation, which excludes food and energy products, continued to tick down gradually, in line with the weak economic growth, and this has been the main contributor to the overall decline in inflation in the last few quarters. The sharper disinflation witnessed in the last few months has been mainly attributed to the falls in food and energy inflation.
India’s inflation outlook has considerably improved from a few months ago. However it is too early to tell whether inflation is no longer a problem in India. Despite real factors driving inflation down, much of the decline is also due to base effect. Between May and November last year, WPI and CPI inflation witnessed a surge, which is now having an downward effect on annual inflation in the same period this year. Furthermore, energy and food prices are volatile and could alter any day. A sharp rise in Middle East and Ukraine conflicts, disruptions in oil supplies and unfavorable weather in India can very easily send inflation in the wrong direction.
As oil prices keep declining and the base effect amplifies, Indian inflation will keep trending down, at least until November. Although the recent slide in inflation increases the chances of some monetary policy easing, the likelihood is still low. Central Bank Governor Raghuram Rajan has been hawkish since the beginning of his term and would require inflation to remain low after the end of the base effect in order to start loosening policy, such as towards the end of this fiscal year.
Expect the Indian economy to remain in status quo until the beginning of 2015, especially as the budget will be announced then. Until then, India will be watching oil and weather forecasts.