India’s wholesale price index (WPI) inflation has surged in April, by a margin higher than what analysts had anticipated. The headline print of 10.49% was led by both food and non-food items.
To be sure, the spike in WPI inflation was expected because conditions for a surge were ripe. Firstly, global commodity prices have been on the rise for the past several months. From metals to minerals and crude oil, prices of most commodities have increased sharply. A weak rupee has also helped inflate prices some more when they reach Indian shores. An increase in fuel prices too added to the headline surge. As such, food inflation too has strengthened off late. The month-on-month increase in this category reflects this.
But what analysts had not anticipated was the increase in inflation for manufactured products. The inflation in this category rose to 9.01%, up from 7.34% the previous month. What this shows is that input costs are making a big dent into companies’ margins and many cases companies are able to pass on these costs too.
What should perhaps worry policymakers is that the headline WPI print would continue to increase in the coming months. Those at Icra Ltd expect 13.0-13.5% print for May and a slow fall thereafter. That is because most of the factors listed above would still be very much present. Global commodity prices are unlikely to cool off. Seasonal spikes in prices of perishables would pressure domestic food inflation and fuel prices too may not soften in a hurry. Most importantly, the adverse base effect would continue to reflect on headline numbers. Recall that last year, the index had shrunk because of the lockdown triggered by the pandemic.
While the headline inflation number should be taken with discretion given the imperfections in the data and the base effect, policymakers cannot completely ignore it. “While the RBI officially targets retail price inflation, the current surge in WPI is likely too high for the bank to ignore," wrote analysts at Barclays in a note.
A hardening inflation at the wholesale level invariably reaches the consumer at the retail level. Indeed, the recent increase in CPI inflation reflects this trend. Granted, WPI and CPI have followed a divergent trend in the past. But the propensity of producers passing on high input costs is more now than before. Even though the economy has enough slack, prices pressures will seep through to the consumer because of supply constraints.
It is likely that inflationary pressures would be in pockets and more through spikes than steady surge. That said, the pandemic’s toll on the economy is likely to keep the Reserve Bank of India (RBI) focused on growth.
