Producers’ inflation based on Wholesale Price Index (WPI) continued to be in the negative zone for a second consecutive month and touched a 90-month low in May at (-)3.48 per cent. Experts say WPI deflation will help maintain retail inflation in the vicinity of the RBI Monetary Policy Committee’s target of 4 per cent in the near term.

 In April, WPI inflation was (-) 0.92 per cent.

“Decline in the rate of inflation in May 2023 is primarily contributed by fall in prices of mineral oils, basic metals, food products, textiles, non-food articles, crude petroleum & natural gas, and chemical & chemical products,” a Government statement issued on Wednesday said.

In the near term

The deflationary trend is expected to continue for some more time. In a note, ICRA said WPI deflation is expected at 2.5-3.5 per cent for June. Despite the sequential uptick in prices of most food items in early June, the yearly inflation in primary food items may remain benign on the back of a high base (+13.7 per cent in June 2022).

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“...Extreme weather conditions, including El Nino, heatwave and the prevailing cyclone storm impart uncertainty to the food outlook in the near term, even though the impact of the same on the WPI (weight: 24.4 per cent) tends to be lesser compared to the CPI (45.9 per cent) given higher weightage in the latter index,” the ICRA note said, adding that global commodity prices have trended 22 per cent lower in this month, even as the USD/INR pair has remained flat as compared to May 2023.

FY24 outlook

For the year as a whole, some experts feel WPI inflation will be moderate. Rajani Sinha, Chief Economist with Care Ratings said WPI inflation is expected to remain subdued in the first half of FY24 supported by consistent fall in international commodity prices and proactive supply-side measures by the government.

“Despite some firming in the second half, we expect WPI inflation to average in the 1-2 per cent range in FY24,” she said. Further chances of a severe El Nino and its impact on agri production and food prices pose an upside risk to WPI inflation. The movement in crude oil prices is another key monitorable.

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The other expectation is for deflation to further push down retail inflation. Paras Jasrai, Senior Analyst with India Ratings and Research said a deflation in WPI in the April-June quarter of FY24 (as indicated by the latest trends) would lead to the nominal GDP growth being closer to real GDP growth. “The possibility of nominal GDP growth lower than real GDP growth in the first quarter remains high. WPI deflation would also help in maintaining the retail inflation in the vicinity of the MPC target of 4 per cent in the near term,” he said.

Retail inflation based on Consumer Price Index (CPI) eased to 4.5 per cent in May.