Rising wholesale inflation: On Wednesday, the US Federal Reserve announced the withdrawal of monetary support to the US economy and predicted three interest rate hikes next year. What prompted the central bank was the inflation levels unseen in almost 40 years. The policy makers in the US are sending a clear signal that the current spike in inflation is not a transitory phenomenon triggered by pent-up demand. High inflation is not a problem confined to the US economy. Globally, most global economies are facing a crisis-like situation.
After the FED announcement, the Bank of England promptly raised the rates. The European Central Bank announced partial withdrawal of its stimulus programme. The Bank of Japan will meet today to discuss possible steps. India also is facing a serious inflation problem. Spiraling prices have far more serious repercussions in low-income countries like India. High inflation means a further decrease in the purchasing power of nearly 8.4 crore Indians who live in extreme poverty.
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India’s wholesale inflation jumped to 14.23% in November 2021 fueled by soaring vegetable and other food prices. This is the eighth consecutive month of in which WPI inflation stayed in double-digits and the highest level since India launched its economic liberalisation programme in 1991. The WPI was at 12.54% in October compared with the same month last year.
The ministry of commerce and industry attributed high inflation in November to rise in prices of mineral oils, basic metals, crude petroleum, natural gas, chemical products, and food. The rising inflationary pressure will have a telling impact on the economy, which is still reeling under the slowdown triggered by the pandemic.
Despite a recent cut in excise duty on fuels, both the wholesale and retail inflations are on an upward spiral. Retail inflation in November, measured in terms of the consumer price index (CPI), recorded a three-month high rate of 4.91%. CPI inflation that captures price rise faced by households was 5.09% for the first 11 months of the year. The gap between WPI and CPI reflects the price pressures on the inputs side and is expected to affect the retail prices in the coming months. A surge in WPI indicates inflationary pressure in the economy and vice versa.
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What is wholesale inflation
WPI measures the changes in the prices of goods that are sold and traded in bulk by wholesale businesses to other businesses. Unlike the consumer price index, WPI does not track the prices of goods and services purchased by consumers. Put simply, the WPI tracks prices at the wholesale, or factory gate/mandi levels, while CPI measures the average price that households pay for a basket of different goods and services. To gauge WPI, analysts track the supply and demand dynamics in industry, manufacturing and construction.
Since April 2017, the base year to calculate WPI was updated to 2011-12 from 2004-05 for the new series of Wholesale Price Index (WPI). This also aligns the index with the base year of other important economic indicators such as GDP and IIP. WPI takes majorly primary articles into account. This is further subdivided into Food Articles and Non-Food Articles.
Food Articles include items such as Cereals, Paddy, Wheat, Pulses, Vegetables, Fruits, Milk, Eggs, Meat & Fish, etc while the Non-Food Articles include Oil Seeds, Minerals and Crude Petroleum. Fuel & Power constituted the next major category in WPI, which tracks price movements in Petrol, Diesel and LPG. The biggest basket is Manufactured Goods such as Textiles, Apparels, Paper, Chemicals, Plastic, Cement, Metals and food articles such as Sugar, Tobacco Products, Vegetable and Animal Oils, and Fats.
The WPI also has a food index which measures the price rise in food articles from the primary articles basket and food products from the manufactured products basket.
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Why WPI inflation rings alarm bells
The rise in WPI inflation is of serious concern tom policy makers as it will translate into higher retail (CPI) inflation in the months to come. If there is an uptick in bulk products prices, manufacturers will pass it on the consumer who will have to bear the brunt. Moreover, WPI does not track transportation cost, taxes and the retail margin.
Both core and manufacturing inflation stayed over 11% for the fifth successive month at the wholesale level. High food, fuel and commodity prices along with supply-side bottlenecks cause a jump in inflation rates at both retail and wholesale levels. Stubborn core inflation rates show that manufacturers are passing on higher cost to end consumers through output prices despite a lack of demand. Higher fuel prices add to the distribution cost.
What lies ahead
Economists fear a decline in demand and higher consumer level prices with various factors at play. This includes the threat of Omicron variant of the coronavirus, shortage in supply and input price pressures. The Omicron is at a rising stage in Europe and the US, which may hamper global supply chains and is likely to keep transportation and logistics costs high.
The RBI had kept its key policy rates unchanged in the monetary policy committee meeting on December 8. After the last MPC meeting, RBI Governor Shaktikanta Das acknowledged increasing inflationary pressure. He said cost-push pressures continue to push core inflation though it is not reflecting fully at the consumer level because of the demand slump. He suggested inflation would peak in the last three months of the current financial year and soften thereafter.
RBI is now expected to keep a close watch on the inflation level at the next monetary policy review in February 2022. Impact of the FED action will reflect in foreign institutional outflows and a weak rupee. It may prompt the RBI to review its stimulus measures and raise rates.
Prachi Gupta is an Assistant Editor with Policy Circle. She is a post graduate in English Literature from Lady Shri Ram College For Women, Delhi University. Prachi started her career as a correspondent with financialexpress.com. She specialises in policy impact studies.