WPI drops to 11-month low of 12.4% in August

Producers’ inflation based on Wholesale Price Index (WPI) dropped for the third successive months to a 11-month low of 12.41 per cent in August. It was 13.93 per cent in July and 11.64 per cent in August last year. Despite a drop in WPI, chances of raising policy rate is still very high as Reserve Bank of India takes trend in retail inflation into consideration for policy review.

The fall in WPI based inflation rate is contrary to retail inflation based on Consumer Price Index (CPI) which rose to 7 per cent mainly on account of composition. On one hand, in WPI, food category has lower weightage and fuel has higher. The rise in food inflation was compensated by negative growth in fuel inflation impacting the headline number. On the other hand, CPI has high weightage for food category and the higher inflation pushed the headline number up.

Still in double digits

Despite the declining for three successive months, WPI based inflation still remains in double digits for the 17th month since April last year. Commenting on the latest number, a statement issued by the Office of Economic Advisor in the Department for Promotion of Industry and Internal Trade (DPIIT) said, “Inflation in August is primarily contributed by the rise in prices of mineral oils, food articles, crude petroleum & natural gas, basic metals, chemicals & chemical products, electricity, food products as compared to the corresponding month of the previous year.”

Inflation in food items in August rose to 12.37 per cent, as against 10.77 per cent in July, on account of costlier cereals, fruits and vegetables. While the rate of price rise in vegetables was 22.29 per cent during the month under review, in case of potato, it was a whopping 43.56 per cent rise.

The same was the case in cereals. While the overall inflation in cereals was at 1.77 per cent, in wheat a 17.35 per cent inflation was seen. And in fruits, it was 31.75 per cent. In fuel and power basket, inflation was 33.67 per cent in August, as against 43.75 per cent in July. In manufactured products and oil seeds, it was 7.51 per cent and (-)13.48 per cent respectively.

Retail inflation within range

RBI mainly looks at retail inflation to frame its monetary policy. Retail inflation has remained above the Reserve Bank’s upper tolerance threshold of 6 per cent for the eighth month in a row and was at 7 per cent in August. To tame the stubbornly high inflation, the RBI has hiked the key interest rate three times this year to 5.40 per cent.

Rajani Sinha, Chief Economist with Care Edge, says that while there was an increase in food inflation, it was offset by easing of other commodity prices including crude oil. WPI has lower weight of food components vis-a- vis CPI, and that would explain the inching down of WPI inflation, even while CPI inflation increased in the period under review. “While easing wholesale inflation is a positive development, it remains to be seen if firms will pass on the benefit to final consumers. If not, then bringing retail inflation within the target range could take even longer. If the easing of global commodity prices sustains, we could expect wholesale inflation easing to single digit by October. We expect WPI inflation to fall below CPI inflation by the end of this fiscal,” she added.

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