CRISIL’s index registers finite signs of cooling prices

First came the decline in global oil and commodity prices. Now, the marked easing in global supply chain stress, which is lowering pressure from other costs for manufacturers.

CRISIL’s input-output cost index — which has fallen to a seven-month low —reflects this. This indicates the second-round effects of high cost of production on CPI inflation may be fading, finally.

Earlier this week, India’s Consumer Price Index-based (CPI) inflation print for May came in at a softer 4.3% (vs 4.7% in April). The Wholesale Price Index (WPI) release brought further cheer. It had sunk deeper into deflation (-3.5% vs. -0.9%).

While both measure inflation in the economy, the WPI tracks movement in costs of manufacturers, while CPI tracks prices for consumers. Unlike WPI, CPI covers services as well. A sustained sharp increase in WPI inflation over time seeps into CPI inflation, as manufacturers tend to pass on higher costs to protect their margins.

Input costs had sharply escalated in the past two years following the pandemic and geopolitical tensions. By mid-2022, however, oil and commodity prices started declining and cost pressures abated. But retail price hikes by manufacturers continued, as the pass-through of high input costs through these years had remained incomplete.

Prices also stayed high as global supply chain snarls had not quite resolved fully, impacting costs of other inputs, transport, and shipping.

In recent months, though, we see distinct signs of the tide turning.

Advanced economies have weaker demand for inputs as their growth slows. An uneven recovery in China this year, after initial exuberance post lifting of restrictions, has further contributed.

With this, pressures on manufacturers to pass on high costs to retail prices have abated, too.

While some sectors where demand is strong could still see price pass-throughs, in most others, they seem to have diminished.

This, in conjunction with slower expected demand in the second half of the current fiscal, means retail prices will increase at a slower pace than last year.