The National Statistical Office (NSO) has released a host of high frequency data on the economy in the last one week. This includes the Index of Industrial Production (IIP) for January and Consumer Price Index (CPI) and Wholesale Price Index (WPI) data for February. What do these statistics tell us about the economy? Here are three charts which try and build a demand, pricing power and inflation story on the basis of these numbers.
Consumer demand has not recovered to
The National Statistical Office (NSO) has released a host of high frequency data on the economy in the last one week. This includes the Index of Industrial Production (IIP) for January and Consumer Price Index (CPI) and Wholesale Price Index (WPI) data for February. What do these statistics tell us about the economy? Here are three charts which try and build a demand, pricing power and inflation story on the basis of these numbers.
Consumer demand has not recovered to post-pandemic levels yet ...
Data from the Centre for Monitoring Indian Economy (CMIE) shows that headline IIP print for the period between April 2022 to January 2023 stood at 136.9. This is significantly higher than the corresponding pre-pandemic value (April 2019-January 2020) which was 129.7. However, a use-based classification of the IIP numbers shows that the economic recovery is uneven in nature and consumer goods sub-category of the IIP is still to return to pre-pandemic values. Within the consumer goods sub-category, it is the consumer-durables sub-head which shows the biggest deficit vis-à-vis pre-pandemic numbers. These numbers clearly suggest that consumer demand is still to recover from the pandemic’s shock.
See Chart 1: Annual growth in various heads of IIP
... and retail inflation has been obdurate
Retail inflation, as measured by Consumer Price Index (CPI) came in at 6.44% in February, virtually unchanged from the 6.52% reading in January . Except in the months of November and December 2022, CPI has stayed above the 6% threshold – it is the upper limit of RBI’s tolerance band under the inflation targeting framework – from January 2022 onwards.
What explains this surge in inflation? An analysis of headline CPI, CPI excluding food, and CPI excluding food and fuel (it is also referred to as core inflation) can help answer his question. Latest numbers show that all of these categories are showing readings above 6% with CPI ex-food being the highest and core CPI being the lowest among the three. However, both CPI ex-food and core-CPI have shown a stickiness over the past year which suggests that price pressures are broad based in the economy.
In an ideal world, weakness in consumer demand should lead to a fall in prices which should lead to a fall in inflation numbers. Why is this not happening in the Indian economy?
See Chart 2: CPI, CPI ex-food and core-CPI
Price hike with a lag: the case of textile industry
Inflation, contrary to what a lot of people think, is not always driven by excess demand (or an overheating economy). At times even a supply shock (rise in prices of inputs) can trigger inflation in an economy. To be sure, the degree to which a supply shock translates into a rise in retail inflation depends on the pricing power of the firm which is selling these products. An analysis of certain sub-categories in WPI and CPI data actually shows different degrees of pricing power in the Indian economy.
The clothing sub-head of CPI data shows an inflation of 8.7% in February. However, the textile sub-head of the WPI shows an annual contraction of 3.5% for this period. What explains this wide divergence in inflation for inputs and output from the same industry? While a simple answer to this question will be profiteering by firms who are refusing to pass on the benefits of the prices to consumers, a slightly long-term comparison shows that output prices did not increase at the same pace when wholesale prices for the input in question jumped sharply. Given the fact that the period of jump in input price was also a period of weak consumer demand, firms possibly could not have passed on the high input prices to the consumers. Now that demand has recovered (relatively speaking) firms can afford to hold back on lowering retail prices even though input prices have come down.
See Chart 3: CPI for clothing and WPI for textiles
To be sure, the industry itself might have undergone a transformation during this period where small firms might have perished due to lack of resources to sustain a period when they could not have passed on high input costs to their consumers. Reporting from one of India’s biggest textile hubs Tirupur in Tamil Nadu, where MSMEs struggled due to high price of inputs, actually suggested that such a process was underway.
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