Wholesale Price Inflation: Looking Back, Looking Ahead

Since the start of the inflation targeting regime of RBI, the main focus was on consumer price inflation. This is because this is the rate of inflation that RBI seeks to target and maintain at the 4% mark. But over the past year, wholesale price inflation has risen in a rather unprecedented fashion.

Since April of last year, inflation based on the WPI (Wholesale Price Index) has been above 10% every month. In April 2022, as shown by the latest data from the Department for the Promotion of Industry and Internal Trade, WPI inflation reached a new psychological milestone: it exceeded 15%.

This is the 13th month of double-digit inflation growth and as such now rules out arguments that a weak base effect is at play. For example, inflation in April of the year last was 10.7%. The 15% spike comes on top of this 10.7% spike in wholesale prices.

With such high headline inflation levels, it is clear that most components of the WPI are experiencing high inflation.

What is fueling WPI inflation?

The table below provides both the inflation rate and the weight of the various sub-components. It is important to note the weighting in order to understand the overall impact of inflation on a single component.

Composition of the wholesale price index (Source: MoSPI)

As can be seen, while the highest inflation has been in fuel prices, it is the smallest contributor to the overall index. Likewise, while inflation for manufactured goods is the lowest – albeit in the double digits – it probably had almost six times the impact on headline inflation due to the weight.

This chart shows how the different components have witnessed inflation.

Food inflation has been hovering around the 9% mark since December 2021. According to Aditi Nayar, Chief Economist, ICRA Limited, “The heat wave led to soaring prices of perishables such as fruits, vegetables and milk, which, together with a spike in tea prices, drove up primary food inflation”.

At first glance, the most glaring culprit appears to be soaring fuel prices. In April, this component peaked at almost 39%. But while the Ukraine crisis may have been the most immediate cause, the fact is that fuel price inflation has been soaring throughout the past year (see CHART 1), long before the invasion of Ukraine.

However, the relatively low weight of fuel prices in the index should be kept in mind.

The biggest push would come from inflation in manufactured goods; it has been in double digits for most of the past 12 months.

What to expect?

There is no one-to-one correlation between wholesale price inflation and retail price inflation. However, RBI studies found that an increase in WPI-food inflation tends to have a “significant” impact on retail food inflation. In other words, when wholesale food price inflation increases, it also leads to higher food prices for consumers.

It should be noted that retail food inflation was already quite high at 8.3% in April. Over the next two months, retail food prices can be expected to rise further simply due to rising food inflation in the wholesale market.

What’s even worse, however, is that higher retail food prices tend to drive up wholesale food prices in turn. In other words, one can enter a vicious circle if inflation is not addressed.

Finally, even though RBI does not target WPI inflation, that does not mean that it does not monitor it. Imported inflation in the form of high energy and commodity prices is a reality, and it will continue to force RBI to act.

High WPI inflation will further convince RBI to raise interest rates and do so urgently. Expect interest rates to rise by at least 75 basis points (or three-quarters of a percentage point) over the next two months.

The flip side of a sharp rise in interest rates, however, is that they will dampen aggregate demand in the Indian economy at a time when aggregate consumer demand is still nascent.

The RBI therefore has a difficult balancing act to pull off: containing inflation (especially from sources over which it has no control, such as high fuel prices) while ensuring that it does not stifle national economic recovery.

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