WPI at 3.36% yoy due to high base

WPI inflation for the week ending Feb 14th declines to 3.36% yoy - lowest in over a year. Lower than consensus (Consensus: 3.38%, Previous week: 3.92%, last year corresponding week: 5.66%). Inflation declined only marginally by 0.1% week over week. So the yoy decline was primarily due to high base. Decline in prices of food articles like vegetable and fruits (-1.68 w/w) drove the food index in Primary article down. A comparison of WPI and CPI Industrial Workers (as shown in chart 2) indicates that CPI for industrial workers has remained high and declined only in Dec to 9.7% from 10.45% in Nov. However, CPI- agricultural laborers and CPI- rural laborers increased from 11.14% each during Dec'08 to 11.62% and 11.35% respectively in Jan'09 as food prices continue to remain high and CPI indices have higher weightage of food. Even in WPI, food index (Primary Articles) has remained high as seen in chart 1. Chart1: WPI and its component (% yoy)                                          Chart 2: WPI and CPI-IW (% yoy)   Bottomline: Higher base will drive WPI inflation to very low single digit by March'09. Recent excise duty and service tax cuts will further lower inflation as these reductions are passed on to consumers over next few months. There is also report of a further pre-poll diesel price cut. A 5% price cut reduces inflation by 20-25bps directly. A good winter (rabi) crop should bring down double-digit rural CPI inflation. The duty cuts, fuel price reduction and good rabi crop will move forward the deflationary period to May instead of July.

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