Moving beyond food, however, the CPI-WPI gap underscores the dilemma faced by monetary policy. Core CPI inflation - that without food and energy prices being counted - persisted at above eight per cent, strongly suggesting that inflationary pressures were still persistent. On the other hand, core WPI inflation (non-food manufacturing), though slightly higher this month, has been at or below three per cent for some time now. This reflects the relatively weak pricing power of producers of goods, who are unable to pass on the higher prices of their inputs to their customers. Taken together with the IIP numbers, this reflects a classic business cycle pattern, in which growth and inflation simultaneously decelerate in the face of worsening demand conditions. The appropriate monetary response to this is to provide stimulus to demand by lowering interest rates. However, the stubbornness of core inflation in the CPI, which the Reserve Bank of India is now using as its policy benchmark, points to why the central bank is maintaining its tight monetary stance, which will, quite obviously, further weaken growth impulses.
The divergence can perhaps be explained by the services component of the CPI, whose rate of price increase is closely linked to wage increases, which, in turn, are predominantly driven by food prices. If this is the correct explanation, then the economy is caught in the so-called wage-price spiral, to which a tight monetary policy stance is a necessary but insufficient response. The close correlation between food prices and rural wages certainly supports this explanation and puts the onus firmly on the government to take some immediate steps to relieve food inflation - sales of rice stocks being a case in point - apart from the structural measures to improve agricultural productivity that are so necessary. Otherwise, the fight against inflation may be lost.