Mon Jan 15 00:30:00 CST 2018

Actual Previous
Y/Y % change 3.58% 3.93%
M/M % change -0.52% 0.69%

India's wholesale price index increased by 3.58 percent in December, moderating from 3.93 percent in November. The index fell 0.52 percent on the month in December after increasing by 0.69 percent in November. In contrast, consumer price index data published last week showed an increase in headline inflation from 4.88 percent in November to 5.21 percent, the highest since mid-2016 and further above the mid-point of the Reserve Bank of India's target range of 2.0 percent to 6.0 percent.

Lower WPI inflation in December largely reflects a pull-back in food inflation after strong increases in recent months. Food prices, which account for around 15 percent of the index, increased by 4.72 percent on the year in December, down from 6.06 percent in November, with year-on-year price gains still very strong for vegetables but markedly weaker for eggs, meat, and fish. Offsetting this drop in food inflation, the year-on-year increase in fuel and power prices (around 13 percent of the index) picked up from 8.82 percent in November to 9.16 percent in December, while inflation for manufactured products (around 64 percent of the total index) was steady at 2.61 percent.

Despite this divergence in WPI and CPI inflation in December, both show that price pressures have strengthened in recent months, in line with forecasts by the RBI. With recent PMI surveys indicating that economic growth has picked up, the outlook for inflation will likely be the main factor that determines the outcome of the RBI's next policy review, scheduled for early February.

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.