Why wholesale price inflation spiked to a record high?
Data released by the government showed that wholesale price index inflation (WPI inflation) spiked to a record high as food and fuel prices surged. The reason for the spike has been largely attributed to a rise in primary food inflation that hit a 13-month high, and a sustained uptick in mineral, fuel and power, as well as oil and gas prices. All of which pushed WPI to a record high of 14.23 per cent in November, from 12.54 per cent in October.
This record WPI double-digit inflation for the eighth month in a row has come as a shock to economists since it was expected tax cuts on fuel announced in early November by the Centre might have given some relief to producers struggling with high commodity and freight costs.
Retail inflation too also spiked to a three-month high of 4.91 per cent. This wide gap between WPI and CPI inflation reflects the price pressures on the inputs side which is expected to pass on to the retail level in the coming months and that may be a cause of worry. But what triggered the WPI to register this record high?
What is WPI and is the surge a cause of worry?
To explain WPI in a simplistic fashion, it tracks prices at the factory gate before the retail level. WPI provides estimates of inflation at the wholesale transaction level for the economy overall and rise in WPI indicates inflationary pressure in the economy and vice-versa. It also helps in timely intervention by the government to monitor inflation before the price hike spills over to retail prices. But it is the CPI-based retail inflation that is more widely used to track policy since it looks at the price at which the consumer buys goods and includes transportation cost, taxes and the retail margin etc.
The WPI numbers are released by the economic advisor in the Ministry of Commerce and Industry. The surge in the WPI is a cause of worry.
Also read: COVID, fuel prices drive food inflation to an all-time high
What are the reasons for the surge?
India has been showing a “rising inflationary trend” in both wholesale and retail levels. The WPI went up to 12.54 per cent during October, while the WPI for September was revised to 11.80 per cent from 10.66 per cent. While the WPI inflation rate in November 2020 was at 2.29 per cent and the retail inflation print for October was at 4.48 per cent and 6.93 per cent in November 2020. However, the retail inflation is within the 4+/-2 per cent target set by the Reserve Bank of India.
Secondly, inflation in both core and manufacturing inflation was also hovering at 11 per cent for the fifth successive month at wholesale level. The continuous surge in the core index showed that manufacturers were passing on higher input costs like fuel prices to their output prices.
Meanwhile, an official statement by the ministry said the WPI climbed 2.73 per cent on a month-on-month basis, attributing the ‘high rate of inflation’ primarily to the rise in prices of mineral oils, basic metals, crude petroleum and natural gas, chemicals and chemical products, food products etc.
Other factors that played a role?
Food inflation, measured by the wholesale food index more, doubled from 3.06 per cent to 6.7 per cent in November and was responsible for the WPI inflation spike. Food has a large weightage in the inflation indices, be it wholesale or retail index since it is the “true core” of inflation dynamics.
Inflation in primary articles also virtually doubled to 10.34 per cent from 5.2 per cent in October. This was responsible for taking the wholesale inflation to record levels. 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 per cent).
Core inflation too at the wholesale level climbed to a fresh high of 12.3 per cent in November 2021. According to an ICRA report, ‘Wholesale Price Index November 2021’, while the extent of the uptick in the core WPI inflation was relatively modest (to+12.2% in November 2021 from+11.9% in October 2021), the magnitude of the month-on-month (MoM) hardening was substantial at 1.3 per cent, driven by basic metals, textiles, paper, chemicals and other non-metallic mineral products.
Also read: Will food inflation deter RBI from a rate cut needed for growth?
Going forward?
Economists around the world think high inflation rates will continue to be the norm. Inflation of commodities such as health, fuel and light, and transport and communications, has turned structural and supply shortages and these are further aiding higher inflation, which cannot be dubbed as transitory, they said, pointed out an Indian Express report. Most economists expect the wholesale inflation to remain at elevated levels in the near term.
According to the ICRA report, 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 INR has depreciated in recent sessions, which would curtail the extent of moderation in the WPI inflation in December 2021.
“We now forecast the WPI inflation to average 11.5-12.0% in FY2022, with the headline and core inflation expected to continue to print in double digits over the next three months and one month, respectively,” said the ICRA report.
What is the implication of rising inflation?
Rising inflation will be used by Opposition parties to target the BJP-ruled central government. The Congress has in fact held a major rally in Jaipur on December 12 to protest against the surge in price rise and inflation. Senior Congress leader and former Rajasthan deputy chief minister Sachin Pilot even went to the extent of saying that the Jaipur rally would become a factor for the “downfall of the BJP government at the Centre in 2024”. Pilot said the Modi government will have to give answers for seven years’ “mis-governance” and take measures to check inflation.
