How worrying is record-high wholesale price inflation?

Pushed by higher food and fuel prices as well as by the impact of rupee depreciation, India’s wholesale price inflation, which acts as a proxy for producers’ prices, accelerated to a record high this November.

The wholesale price index-based inflation rose to 14.23% against 12.54% in October. This is the highest WPI rate in the 2011-12 series and has remained in double digits for the eighth consecutive month.

Fuel and power inflation reached 39.81% while manufactured product prices rose 11.92%. The number has raised fears that this may translate into elevated retail inflation in the short term.  

The retail or consumer price-based inflation, the main indicator monitored by the Reserve Bank of India’s monetary policy committee, rose 4.91% in November.  

The central bank expects retail inflation to be at 5.1% for October-December period, and its communication shows it is comfortable with that number. 

The central bank left interest rate unchanged at a record low of 4% with Governor Shaktikanta Das stressing that RBI’s overarching priority at this stage is revival of growth.

India’s economy expanded 8.4% in the second quarter, the fastest pace among major economies. Higher retail inflation may scuttle its effort to boost growth by keeping interest rates low.

But Bibek Debroy, Chairman of the Economic Advisory Council to the Prime Minister, says WPI inflation is not a cause for concern. 

Companies are slowly turning comfortable in passing on the higher input costs to customers as domestic demand picks up. 

Several FMCG companies like Hindustan Unilever, ITC and Parle Products have effected price hikes in October and November to ease margin pressures. The expectation of a strong demand recovery has provided optimism for companies. 

KBS Anand, Former CEO of Asian Paints, echoed Debroy’s view that inflation is not a worry if the growth sustains. 

Asian Paints and Berger Paints have hiked prices by as much as 20% this fiscal as they expect strong demand going

The gap between wholesale and retail inflation has been widening in the recent months, indicating that companies are yet to pass on input cost inflation. But a softening of crude oil prices and the excise duty cut on fuel may help in

For now, the only thing that is masking the pain of inflation and giving the industry and policymakers a feeling of comfort is India’s expected economic growth.

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