Inflation is down, but why you don’t feel it

Change in prices of certain items have greater impact on the price index and that does not necessarily reflect how inflation affects households.

 |  Macro Matters  |  4-minute read |   17-04-2015
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Inflation measured by the year on year change in the wholesale price index fell the most in nine years for March 2015. According to government statistics, wholesale price inflation fell 2.3 per cent in March from a year ago. What makes the event happier is that the change in the index, when compared to the corresponding period of the previous year, has been negative for five continuous months now.

Effectively this means prices of many items are much lower in March 2015 compared to March 2014.

So have prices really fallen for all of us or is it a case of the big picture misleading us?

It is true many items were cheaper this year than they were in March 2014. A larger part of the downward movement of the index was due to the sharp decline in the international price of crude petroleum. India imports almost three quarters of crude oil required to produce petrol, diesel, kerosene, airline turbine fuel (ATF) and liquefied petroleum gas (LPG) for domestic consumption. Global prices of crude was over 50 per cent lower in March 2015 than it was a year ago but the impact of that fall is limited for us as the government used the opportunity to increase taxes on petroleum products. Here’s a look at the impact of recent price changes on the wholesale price index (WPI):

1. Petroleum products: Positive impact

Changes in the price of diesel has the greatest impact than any other fuel, and indeed than any other item in the basket of items that constitutes the WPI. This is because high speed diesel used as a fuel in vehicles has the highest weight on the index. On a year on year basis (that is, comparing data for March 2015 with March 2014), diesel inflation declined 12.1 per cent.

Inflation due to other petroleum products, too, slid in March. The combined effect of the all petroleum products, categorised together as mineral oils, is much bigger. Mineral oils account for almost a tenth of the weight on the wholesale price index and inflation caused by these items decline a whopping 18.1 per cent in March, year on year. Light diesel oil declined 39.8 per cent, furnace oil fell 37.9 per cent, ATF fell 35.7 per cent, naphtha fell 33.6 per cent, bitumen fell 29.9 per cent, petrol fell 17.7 per cent and kerosene fell 10.4 per cent .

2. Vegetable and fruits: Mixed impact

Vegetables and fruits constitute just under four per cent of the index of wholesale prices. So changes in prices of fruits and vegetables have limited impact on the WPI. On the whole, both vegetables and fruits were more expensive this March than the last. Individually - cabbage was up 55.4 per cent in March on year on year basis, onions were 36.5 per cent higher, tomatoes 33.3 per cent, brinjal 24.3 per cent, peas 23.4 per cent and cauliflower 17.8 per cent. Among the vegetables that became cheaper were potatoes, down 20.7 per cent, and okra, down 15 per cent.

Commonly available seasonal fruits, too, were more expensive. Guava was 45.5 per cent higher and oranges 10.1 per cent. Even bananas – an all season fruit – was 11.4 per cent more expensive on a year on year basis.

The prices of these items may not have changed much when compared with the previous month, ie, February 2015.

3. Cereals and pulses: Negative impact

Cereals and pulses constitute just a little more than four per cent of the WPI, with cereals alone accounting for a little more than three per cent. Prices of cereals remained mostly stable during the month, with wheat getting a little cheaper. But pulses became more expensive, and that put upward pressure on the index. Urad was up 21.9 per cent year on year, arhar 21.4 per cent, masur 27 per cent, and moong 14 per cent. The only relief came from gram (channa) – it moved up only 3.4 per cent.

4. Milk and dairy products: Negative impact

Milk constitutes over three percent and it had risen 7.5 per cent in March 2015 from a year ago. Other dairy products such as butter and ghee, too, were more expensive in March 2015 compared to a year ago.

In conclusion, vegetables, fruits, milk and pulses individually have limited impact on the WPI, but their combined effect is big. All of these were more expensive in March 2015 than a year ago. That is why, when inflation went into negative territory driven mostly by petroleum products, we did not experience much relief from price rise. Inflation declined because the fall in petroleum price outweighed the rise in prices of food.

Writer

Tina Edwin Tina Edwin @tinaedwin

The writer is a Delhi-based journalist.

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