{"id":372262,"date":"2024-02-23T20:33:51","date_gmt":"2024-02-23T15:03:51","guid":{"rendered":"https:\/\/zerodha.com\/z-connect\/?p=372262"},"modified":"2024-03-04T17:13:51","modified_gmt":"2024-03-04T11:43:51","slug":"its-the-economy-stupid-lower-cpi-wpi-trade-balance-and-more","status":"publish","type":"post","link":"https:\/\/zerodha.com\/z-connect\/subtext\/its-the-economy-stupid-lower-cpi-wpi-trade-balance-and-more","title":{"rendered":"It\u2019s the economy, stupid: Lower CPI, WPI, trade balance and more"},"content":{"rendered":"<p><i><span style=\"font-weight: 400;\">We love India Data Hub\u2019s weekly newsletter, \u2018<\/span><\/i><a style=\"font-weight: 400;\" href=\"https:\/\/indiadatahub.substack.com\/\"><i><span style=\"font-weight: 400;\">This Week in Data<\/span><\/i><\/a><i><span style=\"font-weight: 400;\">\u2019, which neatly wraps up all major macroeconomic data stories for the week. We love it so much, in fact, that we\u2019ve taken it upon ourselves to create a simple, digestible version of their newsletter for those of you that don\u2019t like econ-speak. Think of us as a cover band, reproducing their ideas in our own style. Attribute all insights, here, to India Data Hub. All mistakes, of course, are our own.<\/span><\/i><\/p>\n<hr \/>\n<p style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Consumer inflation has come to a three-month low of 5.1% this January, compared to the preceding January. That is, the prices of consumer goods have increased by 5.1% through the year. The inflation was 5.7% back in December 2023.\u00a0<\/span><\/p>\n<p><strong>Those are just random numbers to me. What\u2019s <i>really<\/i> happening?<\/strong><\/p>\n<p style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">How do we measure trends in prices? There are hundreds of things you might want to buy. They\u2019re sold by different people, all of whom think differently about the right price for their products. These pricing decisions come to you at random, divorced from each other. There\u2019s no secret society of shopkeepers that forces everyone to set prices in unison. How, then, do we get a <\/span><i><span style=\"font-weight: 400;\">single <\/span><\/i><span style=\"font-weight: 400;\">number for inflation?<br \/>\n<\/span><\/p>\n<p style=\"font-weight: 400;\">Well, we conjure up an imaginary \u2018basket\u2019 with most things you might want to buy. That\u2019s almost 300 things &#8211; eggs, milk, kerosene, house rent, school fees, movie tickets, alcohol &#8211; all sorts of stuff. We compute the price of the entire basket to come to a \u2018<b>consumer price index<\/b>\u2019 (<b>CPI<\/b>). Changes in the CPI tell us how much inflation we\u2019ve seen. For instance, if the price of this basket was \u20b9100 in January 2023 and rose to \u20b9104 in January 2024, the period in between saw inflation of 4%.<\/p>\n<p style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">But there\u2019s an obvious problem, here. If you\u2019re trying to compress 300 prices into one number, there\u2019s a lot that you\u2019re glossing over. Over the last year or so, for instance, inflation has swung wildly in both directions. Zoom in, however, and you\u2019ll notice that the CPI basket seems torn in two halves, both of which are moving very differently:\u00a0<\/span><\/p>\n<ul style=\"font-weight: 400;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Food has been deeply volatile. In some months, food prices have jumped up by as much as 10%. In others, they have risen by a tame 3%. This has given the year\u2019s inflation figures most of their turbulence. Food inflation fell a little between December and January &#8211; from 8.7% to 7.6%.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The prices of everything else, in comparison, have been fairly predictable. They\u2019ve fallen gently through the last year, and in January, came to 3% &#8211; their lowest point in years.\u00a0\u00a0<\/span><\/li>\n<\/ul>\n<p style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Here\u2019s how all three have behaved:<\/span><\/p>\n<p><a href=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/02\/IMG_1178.webp\"><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-372263 aligncenter\" src=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/02\/IMG_1178.webp\" alt=\"\" width=\"1456\" height=\"1085\" srcset=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/02\/IMG_1178.webp 1456w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/02\/IMG_1178-300x224.webp 300w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/02\/IMG_1178-1024x763.webp 1024w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/02\/IMG_1178-768x572.webp 768w\" sizes=\"auto, (max-width: 1456px) 100vw, 1456px\" \/><br \/>\n<\/a><\/p>\n<p style=\"font-weight: 400;\"><b>Ah. So, is this just how things stay? One half steadily drops while the other flutters at random?<\/b><a href=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/02\/IMG_1178.webp\"><br style=\"font-weight: 400;\" \/><\/a><\/p>\n<p style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Wellll&#8230; A little bit? We\u2019re not sure.<\/span><\/p>\n<p>Food prices are always volatile. It\u2019s just harder for prices to stay stable when your business involves dealing with living things and weather gods. This will always make it difficult to forecast how food prices move.\u00a0<a href=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/02\/IMG_1178.webp\"><br style=\"font-weight: 400;\" \/><\/a><\/p>\n<p style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">But if we were to attempt a guess, the current trend is unlikely to continue for too long:\u00a0<\/span><a href=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/02\/IMG_1178.webp\"><br style=\"font-weight: 400;\" \/><\/a><\/p>\n<ul style=\"font-weight: 400;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">There\u2019s only so much that non-food inflation can drop. The lowest we\u2019ve seen it go in quite a while was during a few months in 2019 when it hovered around 2.8%. It\u2019s unlikely to go much lower than that.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Food prices, on the other hand, have been growing faster than average. There\u2019s some room for things to slow down. If they do, overall inflation will go down further. By how much? Well, food makes for roughly half the CPI basket. If there\u2019s a fall in food prices, the CPI will fall by half as much.<\/span><\/li>\n<\/ul>\n<p style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">For inflation to drop further, hope for food prices to come under control. If core inflation sticks where it is but food inflation drops down to the ballpark of 5.4%, we\u2019ll hit our target of 4% inflation.<br \/>\n<\/span><\/p>\n<hr \/>\n<p style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">When people think about \u2018inflation\u2019, they\u2019re generally thinking about the price a <\/span><i><span style=\"font-weight: 400;\">consumer <\/span><\/i><span style=\"font-weight: 400;\">must pay.\u00a0<\/span><\/p>\n<p>But you can also look at price rises from the perspective of what <i>sellers <\/i>have to pay. Like the CPI, you can put together an imaginary basket of the things that are sold in bulk to businesses, and track how the price of this basket changes. This is the \u2018<b>Wholesale Price Index<\/b>\u2019 (<b>WPI<\/b>).<\/p>\n<p><b>That sounds\u2026 important? Why don\u2019t we look at this more intently when thinking of prices?<\/b><\/p>\n<p>We do. But it\u2019s not <i>as <\/i>useful as the CPI, because we have much less control over it.<\/p>\n<p>The RBI used to consider this a crucial data point till 2016. There was a problem, though. In practice, the WPI <i>strongly <\/i>mimicked the prices of commodities.<\/p>\n<p><b>Hey! HEY! You can\u2019t just throw jargon at me like that!<\/b><\/p>\n<p>Yes, of course. My bad. I\u2019ll explain. <b>Commodities<\/b> are things which are so standardised that you don\u2019t care who made them.<\/p>\n<p>Imagine: you\u2019re standing by an open drain, holding a pack of these cookies that you <i>love<\/i>. I\u2019m nearby, strolling about absent-mindedly, and I walk right into you. The cookies are whacked out of your hand, and before you can react, they fall into the drain. I apologise. You\u2019re still mad. While you\u2019re wondering how hard to slap me, I offer to replace them with a packet of biscuits that I have lying in my bag. Would you accept? Would you see this as fair? At least not immediately. You\u2019ll have questions. You\u2019ll probably want to know the brand of biscuit, and whether they\u2019re the type you like. If you lost a pack of rich, decadent, artisanal cookies and I tried giving you some cheap glucose biscuits instead, you\u2019re not going to be too happy.<\/p>\n<p>Reset. Imagine the same sequence of events, but you\u2019re standing with a can of petrol. Or a bar of iron. If I gave you the same amount of iron or petrol to compensate, would it really bother you? Unlikely. If whatever I gave you was of decent quality, you wouldn\u2019t care too much.<\/p>\n<p>See, while two brands of biscuits can be <i>very <\/i>different, a bar of iron is like any other bar of iron. Iron, therefore, is a <i>commodity<\/i>.<\/p>\n<p>Because all bars of iron are alike, it\u2019s relatively easy to buy one. You don\u2019t have to go meet suppliers, or look through catalogues, or sample their iron, or check whether it is the flavour of iron you like. Iron is iron. If someone will sell you some, you buy it without thinking too hard. This allows iron to be sold in bulk, in giant, world-wide exchanges for a standard price. As long as there\u2019s some quality control in place, you needn\u2019t care where or whom you\u2019re getting it from. You can trust it.<\/p>\n<p><b>Hmm, <\/b><b><i>coooookies..<\/i><\/b><b>. Wait, what were you saying?\u00a0<\/b><\/p>\n<p>Hrmphh.<\/p>\n<p>Commodities are sold in giant, worldwide exchanges, for <i>standard<\/i> prices. Some indices track these prices, such as the World Bank\u2019s commodity price index.<\/p>\n<p>The WPI mirrors this index heavily. There\u2019s a 90% match between the two, in fact. That makes sense, too. Commodities are usually the raw material that people use to make the things they sell. Here\u2019s how closely the two are linked:<\/p>\n<p><a href=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/02\/IMG_1179.webp\"><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-372264 aligncenter\" src=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/02\/IMG_1179.webp\" alt=\"\" width=\"1456\" height=\"1085\" srcset=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/02\/IMG_1179.webp 1456w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/02\/IMG_1179-300x224.webp 300w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/02\/IMG_1179-1024x763.webp 1024w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/02\/IMG_1179-768x572.webp 768w\" sizes=\"auto, (max-width: 1456px) 100vw, 1456px\" \/><\/a><\/p>\n<p style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">But this strong correlation makes the WPI a pointless input for policy-making. There\u2019s a point to tracking inflation when you can actually do<\/span> <span style=\"font-weight: 400;\">something about it. If the WPI mirrors <\/span><i><span style=\"font-weight: 400;\">global<\/span><\/i><span style=\"font-weight: 400;\"> commodity prices, India has very little control over where it goes. It tells us how bad sellers have it, but little else.\u00a0<\/span><\/p>\n<p><b>Got it. So it\u2019s just information for information\u2019s sake.\u00a0<\/b><\/p>\n<p>With one caveat. The WPI does give us an inkling of where the CPI will go. What sellers pay today, buyers will pay tomorrow.<\/p>\n<p>There\u2019s some good news on this front. There\u2019s been no wholesale inflation for a few months. The price of manufactured products, too, has hardly moved. Because things look good for producers, one can hope that things stay good for consumers too.<br \/>\n<a href=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/02\/IMG_1180.webp\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-372265\" src=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/02\/IMG_1180.webp\" alt=\"\" width=\"1456\" height=\"1085\" srcset=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/02\/IMG_1180.webp 1456w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/02\/IMG_1180-300x224.webp 300w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/02\/IMG_1180-1024x763.webp 1024w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/02\/IMG_1180-768x572.webp 768w\" sizes=\"auto, (max-width: 1456px) 100vw, 1456px\" \/><\/a><\/p>\n<hr \/>\n<p style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">India\u2019s international trade inched upwards last month. Both imports and exports this January, compared to the last, have grown by 3%.\u00a0<\/span><\/p>\n<p style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">We usually import more than we export. But the difference between the two &#8211; our <\/span><b>trade deficit<\/b><span style=\"font-weight: 400;\"> &#8211; went down this January to US$ 17.5 billion. This is roughly where it was last January. It hasn\u2019t been this low since last April. Here\u2019s how our trade deficit has looked over the last few years:\u00a0<\/span><\/p>\n<p><a href=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/02\/IMG_1181.webp\"><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-372266 aligncenter\" src=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/02\/IMG_1181.webp\" alt=\"\" width=\"1456\" height=\"1085\" srcset=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/02\/IMG_1181.webp 1456w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/02\/IMG_1181-300x224.webp 300w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/02\/IMG_1181-1024x763.webp 1024w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/02\/IMG_1181-768x572.webp 768w\" sizes=\"auto, (max-width: 1456px) 100vw, 1456px\" \/><\/a><\/p>\n<p style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The Rupee, as a result, will stay strong.\u00a0<\/span><\/p>\n<p style=\"font-weight: 400;\"><b>Huh? Why? That\u2019s a bit of a leap.\u00a0<\/b><\/p>\n<p style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">See, Indians deal in Rupees. Think of what happens to our Rupees when we import or export something.\u00a0<\/span><\/p>\n<ul style=\"font-weight: 400;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">When an Indian exports something to someone abroad, that money reaches their bank account in <\/span><i><span style=\"font-weight: 400;\">Rupees<\/span><\/i><span style=\"font-weight: 400;\">. The buyer, of course, pays in a foreign currency. That foreign currency, however, is sold in international markets, and Rupees are bought for it.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">When an Indian imports something from abroad, the opposite happens. They pay in Rupees. Those Rupees are sold in exchange for the seller\u2019s currency.\u00a0<\/span><\/li>\n<\/ul>\n<p style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">When our imports cross our exports, overall, more Rupees are being sold than are being bought. By how much? <\/span><i><span style=\"font-weight: 400;\">That<\/span><\/i><span style=\"font-weight: 400;\"> amount is our trade deficit.<\/span><\/p>\n<p style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">When our trade deficit is low, fewer Rupees are being sold. The supply for Rupees, therefore, is lower. The Rupee is more scarce in foreign markets, and therefore, is higher in value.\u00a0<\/span><\/p>\n<p style=\"font-weight: 400;\"><b>Uh, sure. Carry on.<\/b><\/p>\n<p style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">A few quick pointers on our exports:\u00a0<\/span><\/p>\n<ul style=\"font-weight: 400;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Our exports have grown, in large part, because we\u2019re exporting far more electronics. That said, at the start of last year, our electronics exports were exploding, and were 40-50% higher than the year before. That growth has dropped to around 9% this January.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">We also saw some growth in our exports of engineering goods, pharmaceuticals and iron ore.\u00a0<\/span><\/li>\n<\/ul>\n<p style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Some points on\u00a0 our imports:\u00a0<\/span><\/p>\n<ul style=\"font-weight: 400;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Our electronics imports have increased massively. Compared to last January, our imports shot up by 25% last month.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Gold imports have doubled compared to last year.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Our coal imports were a fifth higher than last January.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Our imports of machinery, on the other hand, have declined.\u00a0<\/span><\/li>\n<\/ul>\n<hr \/>\n<p style=\"font-weight: 400;\"><a href=\"https:\/\/zerodha.com\/z-connect\/subtext\/this-week-in-data-for-dummies-monetary-policy-consumer-confidence-china-deflation-and-more\"><span style=\"font-weight: 400;\">Last week<\/span><\/a><span style=\"font-weight: 400;\">, we talked about inflation in the US, and how the US Fed may react. There\u2019s a little more on that front, now.<\/span><\/p>\n<p style=\"font-weight: 400;\"><b>Oh. What are they up to?\u00a0<\/b><\/p>\n<p style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The US CPI fell by 0.3% in January, dropping to 3.1%. This is good and bad news.\u00a0<\/span><\/p>\n<p style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The good news: this is well below where US inflation was in early 2023. The bad news: US inflation has now hovered around 3% for over half a year, and is refusing to give way any further. It hasn\u2019t fallen below 3% since March 2021.\u00a0<\/span><\/p>\n<p style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">There\u2019s similar news from the UK, where inflation is stuck around the 4% mark. This chart should give you a sense of things:\u00a0<\/span><\/p>\n<p><a href=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/02\/IMG_1182.webp\"><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-372267 aligncenter\" src=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/02\/IMG_1182.webp\" alt=\"\" width=\"1456\" height=\"1066\" srcset=\"https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/02\/IMG_1182.webp 1456w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/02\/IMG_1182-300x220.webp 300w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/02\/IMG_1182-1024x750.webp 1024w, https:\/\/zerodha.com\/z-connect\/wp-content\/uploads\/2024\/02\/IMG_1182-768x562.webp 768w\" sizes=\"auto, (max-width: 1456px) 100vw, 1456px\" \/><\/a><\/p>\n<p style=\"font-weight: 400;\"><b>Does this matter to India at all?<\/b><\/p>\n<p style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">It does, it does.\u00a0<\/span><\/p>\n<p>Last week, we saw how US inflation and monetary policy impacts monetary policy in India. Look <a href=\"https:\/\/zerodha.com\/z-connect\/subtext\/this-week-in-data-for-dummies-monetary-policy-consumer-confidence-china-deflation-and-more\">here<\/a> for details. But in a nutshell: when the US Fed restricts dollars from entering the economy, it is harder for the RBI to fight inflation.<\/p>\n<p style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Because inflation has been stubborn in the US, the US Fed is unlikely to cut interest rates in the near future. This will push the RBI to keep its rates high, even though inflation is coming under control at home.<br \/>\n<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>This week on Its the economy, stupid, lower CPI and WPI inflation, trade balance, and more.<\/p>\n","protected":false},"author":242542,"featured_media":372268,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[532],"tags":[],"class_list":["post-372262","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-subtext"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v23.5 (Yoast SEO v26.6) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>It\u2019s the economy, stupid: Lower CPI, WPI, trade balance and more &#8211; 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