Third month of WPI deflation in Jun’20
Deflation lower than market expectation
* Wholesale Price Index (WPI) inflation stood at -1.8% YoY v/s -3.2% a month ago (and the market consensus of -2.4%) due to deflation in primary articles (WPI weight: 22.6%) and fuel and power (13.2%). On the other hand, manufactured products (64.2%) jumped back to marginal inflation of 0.1% from deflation in May’20. Just as in May’20, maximum negative contribution came from fuel and power, followed by huge decline in wholesale prices of fuel across the country.
* Interestingly, non-food WPI deflation was higher at 3.8% YoY in Jun’20, indicating decline in prices of wholesale items, excluding food. WPI food (both primary articles and manufactured) inflation actually rose to 3.0% YoY in Jun’20, as against 2.3% YoY in May’20 (Exhibit 1).
* With this, WPI inflation stood at -2.2% YoY in 1QFY21, compared with inflation of 2.2% posted in 4QFY20. This is the first deflation reported in any quarter since 1QFY17.
* Primary articles deflation was at 1.2% YoY in Jun’20, primarily led by deflation in non-food primary articles and crude oil and natural gas. While the former exhibited deflation of 2.8% YoY in Jun’20, deflation in the latter was still in the higher double digits at 33.7% YoY last month.
* 13.6% YoY deflation in fuel and power was attributed to 27.5% deflation in mineral oils. Notably, after dropping to 2.9% in May’20, inflation in electricity rose once again to 5.2% in Jun’20.
* Manufactured items witnessed marginal inflation of 0.1% in Jun’20 on deflation in items such as textiles, leather, paper, basic chemicals, and rubber, offset by higher inflation in manufactured food items and pharmaceuticals, among others.
* Additionally, core (imported) WPI was still in deflation of 2.3% YoY in Jun’20 v/s deflation of 3.2% YoY in May’20 and 0.5% YoY in Jun’19.
* While retail food inflation moderated in Jun’20, WPI food inflation actually rose, indicating the lack of enough supply or supply chain disruptions due to the COVID-19 crisis. Going ahead, provided the economy continues opening up gradually, these disruptions may disappear, leading to the normalization of prices. Overall, even though retail inflation remains at a fairly elevated level, we believe the RBI would prioritize weaker growth over inflation in its monetary policy decision on 6 th Aug’20.
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