Task 4

Inflation

Inflation is the decline of purchasing power of a given currency over time. A quantitative
estimate of the rate at which the decline in purchasing power occurs can be reflected in the
increase of an average price level of a basket of selected goods and services in an economy
over some period of time.

Causes of Inflation

 Demand-pull inflation – aggregate demand growing faster than aggregate supply

(growth too rapid)
 Cost-push inflation – For example, higher oil prices feeding through into higher costs.
 Devaluation – increasing cost of imported goods, and also the boost to domestic
demand.
 Rising wages – higher wages increase firms costs and increase consumers’ disposable
income to spend more.
 Expectations of inflation – causes workers to demand wage increases and firms to
push up prices.

Consumer Price Index

The Consumer Price Index (CPI) is a measure that examines the weighted average of prices
of a basket of consumer goods and services, such as transportation, food, and medical care. It
is calculated by taking price changes for each item in the predetermined basket of goods and
averaging them. Changes in the CPI are used to assess price changes associated with the cost
of living. The CPI is one of the most frequently used statistics for identifying periods of
inflation or deflation.

Whole Sale Price Index

A wholesale price index (WPI) is an index that measures and tracks the changes in the price
of goods in the stages before the retail level. This refers to goods that are sold in bulk and
traded between entities or businesses (instead of between consumers). Usually expressed as a
ratio or percentage, the WPI shows the included goods' average price change; it is often seen
as one indicator of a country's level of inflation.
Reasons causing the gap between WPI and CPI

As the name indicates the WPI measures prices at the wholesale level and CPI at the
consumer level. Beyond the basics, the number and types of items included in the WPI and
CPI basket differ and so does the weights given to these items. Primary articles, consisting of
food articles such as cereals, meat, fish and vegetables; and non-food articles such as cotton,
cooking oil, jute and minerals, etc are given a weight of about 20% in WPI. The second sub-
group is fuel and power, which is given a weightage of 15% and finally manufactured items
consists of 65%. In the CPI basket, there are five main sub-categories, which are Food and
beverages (35.8%), Fuel and Light (8.4%), Housing (22.5%), Clothing, Bedding, and
Footwear (3.9%), and Miscellaneous group which includes services (28%).

Given that the CPI measures retail prices, it is bound to be higher than the WPI, which
measures wholesale prices. This has been the case for a long time now and is not a cause for
concern as long as both the indices are moving in the same direction. The central bank can
gauge the general trend of inflation. However, the latest WPI data available for June was at
-2.4% and CPI inflation was at 5.4%, a whopping 7.8% difference. There has been significant
divergence between the two indices since November 2014, with the WPI steadily dropping
and the CPI inflation crawling upwards, as this graph indicates.

There have been more than a few times when this gap in CPI and WPI has been witnessed.
There is a host of reasons for it, which include the difference in weightage assigned to
different goods/items that make up the two baskets.

For example, in the consumers basket, food has a much higher weightage than in the
wholesale basket. This essentially means a rise in food prices will cause a bigger spike in the
CPI basket than in the WPI one.

Stagflation

Stagflation is characterized by slow economic growth and relatively high unemployment—or

economic stagnation—which is at the same time accompanied by rising prices (i.e. inflation).
Stagflation can also be alternatively defined as a period of inflation combined with a decline
in gross domestic product (GDP).
 Monthly Inflation Rate July 2019-July 2020

QTR July Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun July
19 19 19 19 19 19 20 20 20 20 20 20 20

Growth 5.98 6.31 6.98 7.62 8.61 9.63 7.49 6.84 5.5 5.45 5.1 5.06 5.33
rate

PMI

The Purchasing Managers' Index (PMI) is an index of the prevailing direction of economic
trends in the manufacturing and service sectors. It consists of a diffusion index that
summarizes whether market conditions, as viewed by purchasing managers, are expanding,
staying the same, or contracting. The purpose of the PMI is to provide information about
current and future business conditions to company decision makers, analysts, and investors.

PMI Analysis 2019-2020

QTR Mar Feb Jan Dec Nov Oct Sep Aug Jul Jun May Apr
20 20 20 19 19 19 19 19 19 19 19 19

Growth 50.6 57.5 55.5 53.3 52.7 49.6 48.7 52.4 53.8 49.6 50.2 51.8
rate

PMI ANALYSIS REPORT 2019-2020

FY MARCH 2019 vs APRIL 2019

On the manufacturing side, the PMI declined to 51.8 in April from 52.6 in March. This
represents the slowest expansion in the manufacturing sector since last August. The
moderation was partially due to slower increases in output and new business orders, with
both growth rates falling back to lows last seen in September and weighed on by uncertainty
leading up to the general elections. On the operational front, employment rose in April at a
faster pace than March, input price inflation moderated to the second-slowest rate in almost
two year.

FY APRIL2019 vs MAY 2019

The services PMI decreased for the third consecutive month in May, falling to 50.2 from
51.0. This was partly due to the slowest increase in new business orders in eight months,
owing to a weaker domestic market as export orders increased at the fastest pace in just under
a year. On the other hand, businesses remained optimistic about the economic outlook, and
sentiment was close to the highest levels reached over the past 12 months.

FY MAY 2019 vs JUNE 2019

The services PMI tumbled for the fourth month running in June, decreasing to 49.6 from
50.2, and therefore slipped below the 50-point threshold for the first time since May 2018.
The fall was largely due to stagnant sales, with only a fractional increase in new business
reported. Firms pointed to competitive pressures and weak underlying demand as reasons for
poor sales in June.

FY JUNE 2019 vs JULY 2019

Businesses indicated improved optimism in July about operating conditions in the next 12
months, partly because public policy concerns waned.

The services PMI rose to 53.8 in July, up from the 49.6 reading in June, which marked the
first time the PMI fell below the 50-point threshold since May 2018. This was driven by the
quickest increase in new output in one year and was partly linked by service companies to an
expansionary government budget, which was unveiled on 5 July and contained a 13.3%
increase in planned spending.

FY JULY 2019 vs AUG 2019

The services PMI fell to 52.4 in August from 53.8 in July. This was due to weaker output
growth in the month, which was itself affected by a more modest increase in new business
orders. Despite the slowdown in August, firms continued to hire new workers, although the
hiring rate slowed slightly. The level of outstanding business rose in August, partly due to
delayed client payments.

FY AUG 2019 vs SEP 2019

 The services PMI slumped to 48.7 in September from 52.4 in August, representing the
lowest reading since February 2018, partly on a decrease in new orders logged in the month,
after increasing for 18 consecutive months previously, despite the overall worsening of
demand in September, external demand firmed up, with export orders increasing at a faster
pace than in August.

On the labour front, employment growth softened in September to the weakest rate since
June. In terms of prices, input price inflation eased to the weakest rate in over two-and-a-half
years in September, while output price inflation was little changed and continued to outpace
that for input prices.

FY SEP 2019 vs OCT 2019

The services PMI increased to 49.2 in October, up from 48.7 in September, although still
below the all-important 50-mark. Total sales of service businesses were broadly unchanged in
October, after contracting in September for the first time in over one-and-a-half years. In
terms of where demand was coming from, businesses reported weak demand domestically
but an increase in demand externally, although the upturn in external demand was the slowest
in four months.

FY OCT 2019 vs NOV 2019

The services PMI increased to 52.7 in November, up from 49.2 in October, as business
activity rebounded. Moreover, incoming new work increased at the fastest pace in four
months, partly due to an acceleration in new business growth from overseas. Accompanying
the improved demand conditions in November was an increase in the amount of work
businesses had pending for the second consecutive month. On the labor front, headcounts
increased in November.

FY NOV 2019 vs DEC 2019

The services PMI climbed to 53.3 in December from 52.7 in November due to faster
increases in sales and output.In November as new orders rose at the fastest pace in five
months, spurring production and hiring increases. Manufacturers also increased input buying
marginally in December, marking the first increase in five months, while stocks of input and
finished goods both depleted. In terms of prices, input cost inflation accelerated to a 13-
month high in December, pushing output charge inflation to a nearly three-year high.
 FY DEC 2019 vs JAN 2020

On the manufacturing side, the PMI surged to an eight-year peak of 55.3 in January, up from
52.7 in December, underpinned by a sharp increase in output, which was partly due to a slate
of new orders from abroad, particularly Asia, Europe and North America.

FY JAN 2020 vs FEB 2020

The services PMI hit 57.5 in February, up from 55.5 in January, representing the fastest
increase in services output in over seven years. This latest reading was driven by a marked
increase in new work orders, which contributed to a rise in total sales. Partly as a result of
strong demand conditions, service businesses became more confident in February that output
will increase in the year ahead.

FY FEB 2020 vs MAR 2020

The composite Purchasing Managers’ Index (PMI) produced by IHS Markit slumped to 50.6
in March, down from 57.6 in February and marking the lowest reading in five months. A
reading above 50 indicates a rise in business activity since the previous month. The turn for
the worse in March was due to the global coronavirus pandemic negatively impacting
business activity.

IIP

Index of Industrial Production data or IIP as it is commonly called is an index that tracks
manufacturing activity in different sectors of an economy. The IIP number measures the
industrial production for the period under review, usually a month, as against the reference
period. IIP is a key economic indicator of the manufacturing sector of the economy. There is
a lag of six weeks in the publication of the IIP index data after the reference month ends.

COMPARITIVE ANALYSIS REPORT OF IIP 2019-20

QTR Mar 20 Feb Jan 20 Dec Nov Oct Sep Aug July Jun May Apr
20 19 19 19 19 19 19 19 19 19
Growth -18.3 4.63 2.08 0.45 2.14 -6.63 -4.58 1.1 4.3 2.0 3.1 3.4
rate
COMPARATIVE ANALYSIS REPORT FOR IIP

FY MAR 2019 VS APR 2019

Industrial production increased 3.4% in April in annual terms, up from March’s revised 0.4%
increase and marking the fastest pace of growth in six months. Growth was underpinned by
expansions in the manufacturing, mining and electricity sectors. On a use-based
classification, output of primary goods and consumer non-durables recorded the fastest
expansions in April.

FY APRIL 2019 VS MAY 2019

Industrial production increased 3.1% in May in annual terms, down from April’s revised
4.3% increase. In terms of sectors, growth was notably underpinned by an expansion in the
electricity sector, although the manufacturing and mining sectors posted strong expansions
too. On a use-based classification, output of consumer non-durable goods powered the
growth reading in May.

FY JUNE 2019 VS JULY 2019

All industrial sectors contributed to the overall acceleration in July, including mining,
manufacturing and electricity. By use, industrial production was boosted by strong output
increases of intermediate and consumer non-durable goods, while output of primary and
infrastructure goods also increased, but output of consumer durable and capital goods
decreased at a sharper pace.

Annual average growth in industrial production moderated to 3.2% in July from 3.4% in
June.

FY JULY 2019 VS AUG 2019

IIP fell by 1.1% in August 2019 as compared to 4.3% growth in the month of July. The fall in
factory output was because of lower output from the manufacturing, electricity, capital goods,
infrastructure and consumer durables sector, which registered negative growth in the month
of August. Out of the 23 industry groups, fifteen reported negative growth during the month
of August, representing the widespread impact of the ongoing slowdown.

FY FEB 2020 VS MAR 2020

The Index of Industrial Production fell by 16.7 percent in March over last year. According to
revised data for the previous two months, IIP grew by 2.08 percent in January 2020 and by
4.62 percent in February 2020. For March, data was released with the caveat that information
flow from producing units was impacted due to the lockdown.

India’s industrial output contracted in March as the spread of the Covid-19 virus began to
disrupt economic activity from the middle of the month. The full impact of a nationwide
lockdown, which was imposed on March 24, will be visible only in the month of April.

Industrial output over the April 2019- March 2020 period contracted by 0.7 percent as
compared to a growth of 3.8 percent in the previous financial year. Industrial production was
weak even before the spread of Covid-19 disrupted economic activity. IIP grew by 0.9
percent between April 2019- February 2020 on an annual basis, but the sharp fall in March
led to a contraction in output for the full year.

Anooja Sajeev

Junior Research Analyst

Hedge School of Applied Economics