Wholesale inflation eases to 11.16% in July as food prices soften

Wholesale inflation declined for the second consecutive month to 11.16 per cent in July 2021 from 12.07 per cent in June, even as prices of manufactured goods and crude oil remained elevated. In fact, industry says that inflationary pressure on manufacturing is a cause for concern, particularly for small businesses, especially in these difficult times.  

The wholesale price index (WPI) inflation is at a three-month low but remained in double digits in this fiscal year so far. It was largely due to the low-base effect as there was deflation of 0.25 per cent in July 2020.

The high rate of inflation during the month is primarily due to the rise in prices of crude oil, manufactured products like basic metals, food products, textiles, chemicals and chemical products as compared to the corresponding month of the previous year, the ministry of commerce and industry said in a statement.

The rate of price rise in food articles eased for the third straight month to zero per cent in July, from 3.09 per cent in June. However, prices of onion spiked, recording an inflation of 72.01 per cent in July from 64.32 per cent in June 2021.

WPI inflation cooled for the second month in a row, benefitting from a favourable base effect, softening of food price pressure, and the uncertainty related to the Delta plus variant arresting the rise in commodity prices, said Aditi Nayar, chief economist at ICRA.

“Reflecting the base effect and the supply-side measures taken by the government related to pulses and oilseeds, the primary food index was flat at the year-ago level in July 2021, after having reported a year-on-year inflation for the previous five months,” said Nayar.

Inflation in crude petroleum and natural gas was 40.28 per cent in July, against 36.34 per cent in June.  The average international crude oil price, in Indian basket terms, has declined by 3.4 per cent to $71/barrel during August 1-August 11 from $73.5/barrel in July 2021, after OPEC+ agreed to gradually increase the supply from August 2021, Nayar said.

The uncertainty regarding the spread of the Delta variant across the globe has also contributed to lower crude oil prices, she added.

In manufactured products — that accounts for close to two-thirds of the index — inflation stood at 11.20 per cent in July, against 10.88 per cent in the previous month.

“Firming of inflation despite weak demand conditions may appear somewhat perplexing, said Sunil Kumar Sinha, principal economist at India Ratings & Research. Although supply side disruptions may have had some impact on prices, but as manufacturers are increasingly passing on the rising input costs to their output prices, both wholesale manufacturing and core inflation are showing sustained high inflation, Sinha said.

“The build-up of WPI inflation in manufactured products from 10.9 per cent in June 2021 to 11.2 per cent in July 2021 is worrying. This is because it is impacting the cost of production and reducing the price-cost margin of producers, said Sanjay Aggarwal, president, PHD Chamber of Commerce and Industry. 

High prices of raw materials are posing a serious challenge to small businesses to operate in these difficult times. This needs to be addressed immediately, said Aggarwal.

Wholesale inflation has been on the rise since January with July being the fourth consecutive month in which it has been in double digits. While the monsoon has been 32 per cent below normal in August 2021, kharif sowing has gathered pace. The gap with the year-ago level has eased to 1.8 per cent as of August 13, 2021, from 4.7 per cent two weeks earlier, Nayar said.

As rising tomato prices are a matter of concern, the wholesale food index is expected to record a mild inflation in August 2021, before slipping into disinflation for the next few prints, aided by the base effect, Nayar said. 

The headline WPI inflation is expected to remain in double-digits till October 2021, she added.

The Reserve Bank of India (RBI), which mainly takes into account retail inflation in its monetary policy, last week kept interest rates unchanged. It revised the retail inflation projection to 5.7 per cent during 2021-22 from its earlier forecast of 5.1 per cent.