Now, wholesale inflation touches a 7-month high of 2.59% in Dec

The rate of inflation at the wholesale level surged to a seven-month high of 2.59 per cent in December. As with retail inflation, the rise in prices of food products, especially vegetables and pulses, was the main reason for the spurt.

The Wholesale Price Index (WPI), also known as producers’ inflation, reflects higher realisations for producers. Technically, there are good prospects of producers investing more as they will have surplus money as well as the motivation to expand their existing capacity. However, the bad news is that the surge in the index is not on account of manufacturing.

Ginger-onion-potato impact

Food inflation is up despite the fact that procurement of kharif crops is yet to start in earnest and that farmers are not getting a better price for their produce of vegetables and fruits. The wholesale inflation number was made public a day after retail-level data showed inflation had jumped to 7.35 per cent in December on the back of a significant increase in ginger, onion and potato prices. Discounting their impact, headline inflation stood at 4.48 per cent.

The impact of the increase in telecom tariff has added another 16 basis points to the inflation. The imminent threat looming now is the increase in protein inflation, given the whopping increase in vegetable prices.

Though the level of wholesale inflation is still moderate, it is at a seven-month high. As in the case of retail inflation, the key driver of wholesale inflation is food inflation, which stood at 13.2 per cent in December 2019.

But despite this, wholesale inflation has stayed in the moderate range mainly due to the subdued manufacturing and fuel inflation, both of which were negative in December. The economic slowdown has left the manufacturing sector with very little pricing power.

Coarse cereals and pulses have been driving food inflation since the beginning of 2019. Vegetables began playing a role in March and vegetable inflation has been in double digits since.

Vegetable inflation

Vegetable inflation has become more acute due to the abrupt rise in the prices of onion and tomato. Although a low base played a part in pushing vegetable inflation to 69.7 per cent in December 2019, prices have remained higher so far this winter compared with last winter.

Sunil Kumar Sinha, Principal Economist with India Ratings, said that though retail inflation at 7.35 per cent and wholesale inflation at 2.59 per cent present a contrasting picture, the nominal anchor for the RBI is retail inflation.

“With retail inflation now higher than the targeted level, India Ratings believes irrespective of the fiscal stance to be taken by the government in the Union Budget, the RBI is unlikely to utilise the limited window for a rate cut in its February monetary policy review,” he said.

Also read:CPI inflation spikes, RBI to hit a long pause on rate cuts

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