Number Theory: Understanding India's fresh inflation numbers

This is the first of a two-part series on inflation in the Indian economy. The second part will put the latest inflation numbers in macroeconomic context.

Inflation numbers and the policy commentary around them has been painting a slightly conflicting picture for the past few months. India’s benchmark inflation rate, as measured by the Consumer Price Index (CPI) has fallen, albeit marginally, in the last five months. At 4.75% in May 2024, it was the lowest since its 4.3% print in May 2023. The Wholesale Price Index (WPI) on the other hand, increased to a 15-month high of 2.61% in May 2024. The falling retail inflation

Reserve Bank of India. (HT Photo)

Understanding India's fresh inflation numbers

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  Base effects are a big reason behind the rise in WPI

  This is the most important fact to keep in mind. Wholesale inflation was contracting for seven consecutive months beginning April 2023. While the magnitude of the contraction was just 0.8% in April 2023 on an annual basis it had increased to 3.6% in May. This has played a big role in the increase in headline WPI print from 1.26% to 2.61% between April and May this year. As far as CPI is concerned, there is no such base effect at play. To be sure, it needs to be kept in mind that the composition CPI and WPI baskets is not the same as they are designed for different purposes. While CPI is meant to track inflation’s impact on household budgets, WPI is more a proxy for producer prices in the economy and includes many industrial inputs. Therefore, it is important to not confuse the two indices are representative of inflationary environment for similar commodities in retail and wholesale markets.
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  In case of both CPI and WPI, it is food which is driving the headline print

  A disaggregated analysis of both the indices makes it crystal clear. Food items have a weight of 39% in the CPI basket and 24% in the WPI basket. The food inflation value for CPI and WPI in May 2024 was 8.7% and 7.4% respectively. Non-food inflation in the CPI and WPI series in May stood at just 2.3% and 0.7% respectively. While retail food inflation has held steady in the past few months, wholesale food inflation saw a big jump in the month of May.
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  Further disaggregation of CPI data shows that food inflation pressures are still broad-based

  What is driving food inflation at the moment? Is it just one or two food items? A disaggregation of CPI food basket shows that while vegetables are playing a big role in keeping food inflation high, they are not the only driver. The best way to understand this is to look at the weighted contribution of each component on CPI food basket in the change in overall food inflation in CPI. While vegetables had a contribution of more than 40% in May 2024, cereals contributed another 24% and pulses too had a contribution of about 12%. This is exactly why the performance of monsoon will be a critical driver of inflation going forward.
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  And food inflation has been a problem for a long time now

  A look at annual inflation numbers shows this clearly. Retail food inflation was 7.45% in the fiscal year 2023-24 despite a high base of 6.66% in 2022-23. In fact, food inflation has been above the 6% mark in four out of past five years. A major reason for food inflation continuing to be high is repeated seasonal shocks to production of food items at different points of time. With the deepening of climate crisis and its role in making extreme weather events more frequent, this is a problem which is only going to get worse. What will this increasing skepticism about food prices and overall inflation mean for the Indian economy? The second part of this series will try and answer this question in detail.