Wholesale inflation bucks retail trend, rises to 15.9%

India’s wholesale inflation rose 15.88% in May, staying in double digits for 14 consecutive months as the cost of food, fuel and primary goods increased. The Wholesale Price Index (WPI) in May was higher than 15.1% recorded in April, unlike retail inflation, which moderated to 7% in May from 7.8% the preceding month. The latest factory gate inflation number is the highest since March 1995, when it stood at 17.2%, according to the database of the Centre for Monitoring Indian Economy, a research firm. It comes at a time the government and the Reserve Bank of India have initiated measures to tame the rise in retail prices.The fact that wholesale prices grew in double digits in April and May despite the high base of 10.7% and 13.1% in April and May last year underlines the magnitude of price pressures in wholesale markets.The headline WPI number rose in May due to a rise in cost of primary articles (15.45% in April to 19.71% in May), fuel and power (38.66% to 40.62%) and food items (8.88% to 10.89%), although inflation in prices of manufactured goods declined from 10.85% to 10.11%. While price rise in the mineral oils subcategory was the biggest driver of fuel inflation, with an annual growth of 61.9% in May, that of electricity increased from 10% in April to 16.2% in May.The Reserve Bank has increased the policy rate by 0.9 percentage points over the past month, in two instalments, to 4.9%. The central government in Mayreduced levies on auto fuel to provide a cushion to galloping pump prices. To be sure, the government’s efforts towards containing inflation in food items seems to have had some success. Wholesale prices for wheat grew at 10.7% and 10.55% in April and May, a reduction from 14% in March. India banned wheat exports on May 13 in wake of rising domestic prices and lower procurement. However, a sharp rise in vegetable and fruit inflation, from 16.9% in April to 32.3% in May, meant that the headline food inflation number actually went up in May.The government’s steps to contain food prices are in tandem with monetary policy making the final pivot to contain inflation. The central bank has increased policy rates by 0.9 percentage points since May and hiked the cash reserve ratio by 0.5 percentage point in May to suck out excess liquidity from the system.The May factory gate inflation is in contrast with the trend in Consumer Price Index (CPI), which moderated to 7% in May from 7.8% in April. While the composition of the WPI and CPI baskets is different since the former is a proxy for producer prices and the latter measures the prices of items in an average household’s consumption basket, it remains to be seen whether the divergent trend continues.If it does, it would mean producers are reluctant to fully pass on the burden of input price hikes to consumers, fearing a weakening in demand.“In select manufacturing segments like textiles, paper and chemicals, inflation firmed up to 14.86%, 15.99% and 13.94%, respectively, in May 2022, each a five-month high,” Sunil Kumar Sinha, senior director and principal economist at India Ratings and Research, said in a note. “Textiles segment, which witnessed a contraction in output during March-April 2022, is facing a double whammy, whereby input costs are rising and domestic demand is weakening.” The latest WPI number is a sign of persistence of the inflation problem, experts said.“We expect supply shortages and price increases in a number of input goods to keep domestic inflation high, setting the stage for further policy tightening by the RBI. While government has unveiled a series of supply side measures, we do not think these will materially alter the inflation path,” Rahul Bajoria, managing director and chief India economist at Barclays, a lender, said in a note. “Over the next three meetings (August, October and December), we expect RBI to make inflation management its key priority, which could include steps to curb aggregate demand,” Bajoria said.

ABOUT THE AUTHOR

Roshan Kishore is the Data and Political Economy Editor at Hindustan Times. His weekly column for HT Premium Terms of Trade appears every Friday.
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