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Explained: Why is WPI inflation at a record high and what are the implications?

Wholesale inflation jumped to 14.23 per cent in November from 12.54 per cent in October. Why is the rising trend a cause for worry? What implication could it have?

Written by Aanchal Magazine , Edited by Explained Desk | New Delhi |
Updated: December 14, 2021 3:14:00 pm
At Dadar vegetable market near Dadar station. (Express Photo: Prashant Nadkar, File)

Wholesale inflation, based on the Wholesale Price Index, jumped to 14.23 per cent in November from 12.54 per cent in October (on a year-on-year basis), primarily due to rise in food prices especially of vegetables, and minerals and petroleum products, data released by the Ministry of Commerce & Industry on Tuesday showed. This is the highest level of wholesale inflation in the 2011-12 series and eighth consecutive month in which it has stayed at double-digit level.

This comes after the retail inflation print for November, released Monday, had shown a spike to a three-month high of 4.91 per cent despite a cut in excise duty on fuels. The wide gap between WPI and CPI inflation reflects the price pressures on the inputs side, which are expected to pass through to the retail level in the coming months.

Rising inflationary trend

Inflation rates at both wholesale and retail levels are showing a rising trend. The WPI grew 12.54 per cent during October, while the WPI for September was revised to 11.80 per cent from 10.66 per cent. The WPI inflation rate in November 2020 was at 2.29 per cent. The retail inflation print for October was at 4.48 per cent and 6.93 per cent in November 2020. It is, however, within the 4+/-2 per cent targeted range of the Reserve Bank of India.

Both core and manufacturing inflation stayed over 11 per cent for the fifth successive month at wholesale level. The surge in the core index with a perceptible uptick across the sub-groups shows the pervasive commodity and input price pressures. This is reflective of manufacturers passing on the higher input costs to their output prices. Fuel continues to push up input cost pressure, despite the cuts.

Factors behind the uptick

High food, fuel and commodity prices along with supply-side bottlenecks are reflected in the inflation rates at both retail and wholesale level. A sharp surge in primary articles inflation which doubled to 10.34 per cent in November 2021 from 5.20 per cent in October 2021 was mainly responsible for taking the wholesale inflation to record levels. Within primary articles, food articles inflation jumped to 4.88 per cent in November from negative 1.69 per cent a month ago. At retail level, food inflation increased to 1.87 per cent in November from 0.85 per cent a month ago.

Inflation in crude petroleum at the wholesale level inched further to 91.74 per cent in November 2021 as compared to 80.57 per cent a month ago. As a result, fuel and power inflation remained firm at 39.81 per cent in November 2021 (October 2021: 37.18%).

Core inflation — the non-food, non-fuel inflation component — jumped to a five-month high of 6.08 per cent at retail level in November. At the wholesale level, it climbed to a fresh high of 12.3 per cent in November 2021.

“This was the fifth successive month in which they have remained in excess of 11%. Sticky core inflation indicates that manufacturers are increasingly passing on the higher input costs to their output prices despite uneven recovery in demand. Since fuel is a major input into transportation cost, higher fuel prices push up the distribution cost further. Consequently, inflation in seven groups namely, textiles, paper & chemicals, rubber & plastics, basic metals, fabricated metals and furniture has been in double-digits now for six successive months, with textiles, paper and chemicals touching a new record high in November 2021,” said Sunil Kumar Sinha, Principal Economist, India Ratings and Research.

Gap between WPI and CPI inflation

Despite not being a policy tool, the surge in the WPI is a cause of worry. While the CPI-based retail inflation — the more widely tracked policy tool — looks at the price at which the consumer buys goods, the WPI tracks prices at the wholesale, or factory gate/mandi levels.

Between the wholesale price and the retail price, the difference essentially is the former only tracks basic prices devoid of transportation cost, taxes and the retail margin etc. And that WPI pertains to only goods, not services. 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).

Trend going ahead

Economists said the period of low inflation is over. Inflation of commodities such as health, fuel and light, and transport and communications, has turned structural and supply shortages are further aiding higher inflation, which cannot be termed as transitory, they said

“Going forward, any relief on the fuel front seems unlikely. Although the Brent crude has softened from the recent high of $84/barrel it still remains above $72/barrel in the international markets. Furthermore, the spread of the Omicron variant in Europe and the US may not let the disruption in global supply chains to normalise and may also keep transportation and logistics costs high. India Ratings & Research therefore expects the wholesale inflation to remain at elevated levels in the near term,” Sinha said.

Input price pressures and supply-side shortages are pushing up prices at the consumer level and going ahead may further impact demand. The risks from the new Omicron variant are also expected to create upside risks for global commodity prices.

“Although the prices of various food items have displayed a seasonal downtrend and those of several commodities have corrected to an extent following the reality check provided by the Omicron variant, the Rupee has depreciated in recent sessions, which would curtail the extent of moderation in the WPI inflation in December 2021. We now forecast WPI inflation to average 11.5-12.0% in FY2022, with headline and core inflation expected to continue to print in double-digits over the next three months and one month, respectively,” Aditi Nayar, Chief Economist, ICRA said.

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Most economists said RBI would be keeping a close watch on the inflation level but may focus on growth in the next monetary policy review in February 2022. The RBI had kept its key policy rates unchanged in its monetary policy review on December 8. “Recent pro-active supply-side interventions by the government continue to restrain the pass-through of elevated international edible oil prices to domestic retail inflation. Crude prices have seen a significant correction in recent periods. Cost-push pressures from high industrial raw material prices, transportation costs, and global logistics and supply chain bottlenecks continue to impinge on core inflation. The slack in the economy is muting the pass-through of rising input costs to output prices,” the RBI had said. It has projected CPI inflation at 5.3 per cent for 2021-22 and at 5.1 per cent in Q3; 5.7 per cent in Q4 and at 5 per cent for the first quarter of financial year 2022-23.

The trend of surging inflation metrics has political repercussions, especially given the assembly elections next year. On Sunday, the Congress organised a large rally in Jaipur to protest against price rise and inflation. “Today is a historic day for Rajasthan as a national rally is being organised in Jaipur to protest against the rising inflation due to wrong policies of the Central government, in which all the senior leaders of the party including the top Congress leadership are participating,” Rajasthan Chief Minister Ashok Gehlot had tweeted Sunday.

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