September 14, 2016 01:30 CDT

Consensus Actual Previous
Y/Y % change 4.01% 3.74% 3.55%

WPI inflation accelerated more modestly than expected in August. At 3.74 percent, the annual rate was up less than 0.2 percentage points versus its July reading and was in excess of 0.25 percentage points short of the market consensus.

The pick-up in the headline rate was partly due to fuel where prices were 1.62 percent higher on the year after a 1.0 percent decline in July. However, the manufacturing rate rose from 1.82 percent to 2.42 percent while food was sharply weaker at 8.23 percent, a fall of almost 3.6 percentage points from last time.

Overall the RBI should not be displeased with the August WPI report which suggests that pipeline pressures on consumer prices are not getting out of hand. Following a much softer CPI print last month, a cut in official interest rates in October remains at least a possibility.

The Wholesale Price Index (WPI) covers primary articles, manufactured products and fuel and power. The data are not seasonally adjusted and the main focus in on the annual change in the index. This can be seen as an indicator of pipeline price pressures and is a loose leading indicator of consumer price inflation as targeted by the RBI.

The Wholesale Price Index is closely followed as an indicator of inflation by the Reserve Bank of India, as well as many Indian corporations and banks.

Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the WPI influence the markets - and your investments.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the WPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.