Explained: Despite not being a policy tool, why the WPI surge is worrying

So, the WPI basically captures the average movement of wholesale prices of goods and is primarily used as a GDP deflator (the ratio of the value of goods an economy produces in a particular year at current prices to that of prices that prevailed during the base year).

The surge and its relevance

Two main reasons. The WPI data comes right after the retail (CPI) inflation scaled a four-month peak of 5.52 per cent in March. In recent years, the WPI and CPI have shown a degree of dissonance, given that the WPI has a higher weight of manufactured goods and the CPI has a greater constitution of food items. The convergence of sorts in March is a warning sign, given that a higher print of both indices portends an economic phenomenon of too much money chasing too few goods and services.

Two, there are concerns that the higher inflation on the wholesale side could eventually spill over to the retail level in the following months, especially if the new lockdowns and restrictions hit supply chains.

Although WPI numbers are not the RBI’s main metric for the purpose of setting monetary policy, the sharp spike in March could dissuade the Monetary Policy Committee from looking at rate cuts well into the future, even as yet another economic disruption looms large due to the Covid caseload surge. More disruptions could translate into higher inflationary expectations.