WPI (Wholesale price index) deflation eased to -4.5% year-on-year (y-o-y) in September 2015 from -4.9% in August 2015, marginally lower than expectations (Please see Figure 1). WPI food price inflation rose to 0.2% y-o-y from -1.5% in August 2015, with faster inflation momentum in the pulses (38.6% y-o-y) and spices (11.8% y-o-y) categories. These observations have been made in a Nomura research note.
Fuel price deflation deepened to a record low of -17.7% y-o-y owing to a broad-based decline across all fuel categories (excluding electricity). Meanwhile, the core WPI (WPI manufactured ex-food) contracted -1.9% y-o-y, unchanged from August 2015.
Much of the WPI deflation continues to reflect lower y-o-y global commodity prices, rather than weaker domestic pricing power, points out Nomura. A breakdown of the WPI into commodity and ex-commodity prices shows that while WPI commodity prices contracted -16.1% y-o-y, WPI-ex commodity prices actually rose 0.7% y-o-y in September (Please see Figure 2).
Even though input costs are lower, firms have broadly held their output prices stable, suggesting ongoing margin expansion, observe Nomura analysts in the research note (Please see Figure 3).
In their inflation analysis, Nomura analysts observe that underlying trends suggest that WPI deflation is bottoming out. Indeed, even though y-o-y WPI readings remain negative, food and manufactured product prices (metals, cement) rose sequentially in September 2015. Nomura expects WPI inflation to remain negative until end-2015, but as base effects wane, it should turn positive from Q1 2016 onwards. Nomura expects WPI deflation to cease, but price pressures are expected to stay subdued.