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The CPI downward trajectory started in February 2020, after the historic highs in January 2020, seem to have enough legs to march on for a few more months, barring extremities. The Wholesale Price Index (WPI) has fallen to a new low of 1.5 percent for May 2020, down from as high as 17 percent in May last year.

Now the WPI has often proved to be a leading indicator for the CPI movement. This space had flagged double digit inflation back in July 2019 looking at the heating WPI (see: WPI heating up, published July 18, 2019). The WPI has now been going in a completely different direction, but before getting too excited, May’s number at 1.5 percent could well be short-lived, as it is massively dominated by the fuel price reduction.

The WPI composition makes for interesting reading and could foretell where the CPI is headed to. Agriculture products have the highest weightage of little over a quarter in the WPI basket and also the least volatile of the major categories. In the past year or so, agriculture WPI has continued to stay in double digits, largely flattish.

Food category with the third highest weight at 20 percent has followed a remarkably similar pattern, with minimal volatility. With the WPI deep down in single digits – both agriculture and food continue to be relatively higher. Agriculture has come down to single digits, and if it indeed is a leading indicator for food WPI – that should also come down to single digits in a month or two.

The WPI movement has of late been dominated by changes in transportable goods, in which diesel, petrol and furnace oil have significant weightage. Being mostly regulated imported commodity products, the price volatility is understandable. The recent slide in petroleum prices is reflecting well in WPI values. Depending upon government’s consideration of taxes from petroleum, the prices may come back a bit – but are still likely to remain lower on year-on-year basis, for the months to come, and should keep the second highest WPI category, with a 22 percent weight well within single digits.

Lastly, the sub-index of electricity and gas may well have only a 12 percent share – but it has often been leading the impact. For much of the last year, electricity and gas prices were high, as the early bitter pill was taken well before the IMF programme. The chart shows how electricity and gas have dominated the WPI in terms of impact. The price changes have been less frequent but bigger in magnitude. Even in the latest monthly WPI, the sub-group led the way with the highest impact, although the change has come down from as high as 50 percent a few months ago, to 22 percent.

More than any other thing, it will again be the electricity and gas sub index that is going to dictate the WPI. With all utility tariffs frozen for the neat future, and adjustments deferred, the tariffs in some cases would actually be lower than last year. For gas, the price change due in June is highly unlikely, which is going to take the sub-index significantly down. That is good news for CPI in the months to come.