Thu Jun 14 01:30:00 CDT 2018

Actual Previous
M/M % change 0.94% 0.69%
Y/Y % change 4.43% 3.18%

India's wholesale price index increased by 4.43 percent on the year in May, accelerating from 3.18 percent in April, and advanced 0.94 percent on the month, after an increase of 0.69 percent previously. This is the second consecutive increase in WPI inflation, with CPI data released earlier in the week also showing a pick-up in consumer inflation from 4.58 percent in April to 4.87 percent in May, further above the mid-point of the Reserve Bank of India's target range of 2.0 percent to 6.0 percent.

The increase in WPI inflation in May reflects stronger gains in food and fuel prices. Food prices, which account for around 15 percent of the index, advanced by 1.60 percent on the year in May, up from 0.87 percent in April, with vegetable prices increasing by 2.51 percent on the year after falling 0.89 percent previously. The year-on-year increase in fuel and power prices (around 13 percent of the index) picked up from 7.85 percent in April to 11.22 percent in May, while inflation for manufactured products (around 64 percent of the total index) increased from 3.11 percent to 3.73 percent.

At their latest policy review, held last week, the RBI's Monetary Policy Committee increased policy rates and revised up their near-term consumer inflation forecasts in response to to pick-up in underlying price pressures seen in April. Headline CPI inflation is now forecast to be 4.8 percent to 4.9 percent in the first half of the new fiscal year, compared with a previous forecast of between 4.7 percent and 5.1 percent, and to fall to 4.7 percent in the second half, compared with the previous forecast of 4.4 percent.

At last week's meeting officials also noted several risks to the inflation forecast that could prompt further upward revisions to these forecasts in coming months, while stressing again their determination to keep inflation close to 4.0 percent. This suggests further rate increases may be considered in order to help bring headline inflation back toward this level. The next policy review is scheduled for early August.

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.