WPI inflation at 2-year high of 3.74% in August

This, despite fall in food inflation

Wholesale price index (WPI)-based inflation rose to a two-year high of 3.74 per cent in August, from 3.55 per cent in July. However, even at this level, it remained lower than CPI-based inflation, which fell to 5.05 per cent, from 6.07 per cent over this period.

This was the fifth straight month of WPI inflation after continued deflation for over a year. The opposite trend in the headline numbers was despite the fact that food inflation declined in both. This was because the food index has lower weightage  of about 14 per cent, against about 45 per cent in CPI.

WPI food inflation fell to 8.23 per cent in August from 11.82 per cent in July. CPI-based food inflation had declined to 5.91 per cent, from 8.35 per cent. Also, there  was a fall in overall WPI by 5.06 per cent in August 2015, which statistically showed inflation in August 2016 a bit higher.

This presents a contrasting picture for the new Reserve Bank (RBI) governor for any monetary tweaking at next months’ review. However, the fact that WPI inflation is still below four per cent would give some comfort to the central bank if it wants to cut the policy rate to spur dwindling economic growth.

Economists believe RBI might cut  the policy rate in the December review, and not in October, as it might want to see the impact of pay increases for central government staff and pensioners. The revision was implemented  from the August salaries, paid in September.

Meanwhile, core WPI inflation (in manufactured items, without the food part) slightly increased from 0.1 per cent in July to 0.6 per cent  in August. CPI core inflation also inched up, from 4.6 per cent to 4.7 per cent  in this  period. Core  inflation is taken  as  the key factor behind  RBI’s move on the policy rate. “The mild uptick in core CPI inflation in August, in conjunction with the risks from the pay revision, warrant some caution, suggesting a lower likelihood of a rate cut in the October policy,” said Aditi Nayar, senior economist with rating agency ICRA.

A business chamber which usually is in the forefront in asking for rate cuts by the central bank also felt that these might come only by December, though the reasons it cited also include redemption pressure on foreign currency non-resident (FCNR) accounts and central bank moves  in   other parts of the world. Says Assocham: “RBI being guided by CPI, which has fallen sharply for August, might not be in a position to reduce the key interest rates since the fall in CPI is not yet sustained and might rise above six percent in the coming months (due to the factors mentioned).”

However, Ficci president Harshavardhan Neotia said: “We look forward to an accommodating stance in the monetary policy to be announced next month.”

Even as WPI food inflation declined, the rate of price increase in pulses remained elevated at 34.55 per cent in August, a minor moderation from 35.76 per cent in July. As for CPI inflation in pulses, it declined to 22.01 per cent, from 27.53 per cent.

The meat, egg and fish category saw WPI inflation rising to 8.75 per cent in August from 7.49 per cent in July. While overall inflation in vegetables sharply came down to 0.17 per cent in August from 28 per cent the previous month.

However, there were pressure points. For instance, potato prices rose at 66.72 per cent in August from 58.78 per cent in July and inflation in tomatoes stood at 21.5 per cent. The rise in onions was 64.19 per cent, from 36.29 per cent.

Going forward, food inflation  might moderate due  to  kharif output coming into the markets, CARE Ratings said. However, it also cautioned that crop loss due to floods in some parts could put upward pressure on the price of food products. Overall, it expected WPI inflation to average three per cent this financial year. Nayar expects 4-4.5 per cent inflation in the remainder of 2016.  

Inflation in manufactured products, constituting almost 65 per cent of the WPI, rose to 2.42 per cent in August from 1.82 per cent in July. Processed food products also saw higher inflation at 11.35 per cent against 10.19 per cent. Inflation in sugar was 35.36 per cent in August; in edible oil, it rose to 5.56 per cent from 4.18 per cent.

Sunil Kumar Sinha, principal economist, India Ratings & Research, said with consumption demand showing signs of improvement and the commodity price cycle bottoming out, it appears manufacturers are now raising their prices, albeit gently to test the waters.

“However, sustainability of this gradual increase in the prices of manufactured items would depend on how much the consumption demand holds in future,” he says.

Meanwhile, the WPI inflation for June was revised from provisional estimate of 1.62 per cent to 2.12 per cent. Inflation numbers were revised sharply earlier as well. Nayar says,”The wholesale inflation has undergone a sizable upward revision of 40-50 bps for the last four months, which is a source of some concern,” Nayar says.