Four-Year High Wholesale Price Inflation

What is the issue?

• The Wholesale Price Index (WPI) rose 5.77% on a year-on-year basis to a 54-month high in June 2018.
• The inflation scenario demands a closer look at the macro-economic conditions.

What are CPI and WPI?

• Both measure the inflationary trends i.e. movement of price signals within the broader economy.
• WPI tracks year-on-year wholesale inflation at the producer or factory gate level.
• It is a marker for price movements in the purchase of bulk inputs by traders.
• Consumer Price Index (CPI) tracks changes in prices levels at the shop end.
• It is thus reflective of the inflation experienced at the level of consumers.
• The two indices differ in the manner in which weightages are assigned.
• This applies to food, fuel and manufactured items as well as their sub-segments.
• E.g. weightage of food in CPI is far higher (46%) than in WPI (24%).
• Also, WPI does not capture changes in the prices of services but CPI does.

What are the driving factors for WPI rise?

• Rising crude oil prices has persistently driven inflation.
• Inflation in the fuel and power group has risen every month in the recent period.
• Food articles, especially vegetables, have been on a rising trend as well.
• The inflation in politically sensitive duo of potatoes and onions is a notable cause.
• Manufactured products (largest weight in the WPI) are also on an inflationary trend.
• WPI rise is also to be seen from the perspective of an unfavourable base effect.
• It is the effect of the previous year taken as the base for calculation.
• This is because the WPI inflation in June 2017 was just 0.9%.

Is WPI rise a concern?

• Policy - In 2014, RBI had adopted CPI as its key measure of inflation from the earlier WPI.
• India thus shifted to CPI as the benchmark for deciding policy rates (e.g. repo rate).
• Accordingly, RBI has a target to keep consumer-level inflation at 4% (+/- 2%).  
• Any rise in CPI inflation beyond this comfort zone pressurises RBI to hike interest rates.
• So WPI rise might not appear relevant from a policy perspective.
• Economy - However, price changes at the producer level usually get transmitted to the consumers.
• But this could come with a time lag or may not be to the full extent of the impact at the producer level.
• So, the apprehensions with a higher WPI may not be valid at all times.
• Nevertheless, a steady rise in WPI is certainly an indicator of an overall inflationary pressure.
• It reflects the unbalanced conditions within the broader economy.
• Retail - There is a concern of a cascading effect of WPI increase on the CPI.
• This remains even after discounting for the base effect.
• Evidently, the retail inflation (CPI) had risen to a 5-month high of 5% in June, 2018.

How does it affect growth?

• Inflation-growth relationship is “significantly negative” if inflation is above a threshold value.
• It is “insignificant or significantly positive” if inflation is below the threshold value.
• Simply, inflation to a certain extent is favourable to the economy, above which it becomes harmful.
• But generally, the threshold values in developing countries are relatively higher.
• In India's case, roughly 4 to 5.5% inflation is said to be the range, above which it retards GDP growth rate.
• But substantial gains can be achieved if inflation is kept below the threshold.

How does the future look?

• Government has recently decided to increase the minimum support price for kharif crops.
• A possible inflationary pressure due to this exists already.
• On the other hand, inflationary trend has reinforced the expectations of a repo rate hike.
• As, rate hike would be a measure of controlling the inflationary trend.

• However, IMF in a recent update has said the Indian economy will grow slower than estimated earlier.
• It has also cut India’s growth projection for 2018-19 by 10 basis points to 7.3%.
• The pressure on growth due to the added impacts of inflation and faster interest rate hikes is the reason.
• Thus, balancing between inflation and growth prospects would be a challenging task for the policy makers in the near future.

Source: The Hindu, Indian Express