The Wholesale Price Index (WPI), which acts as a proxy for producer prices, grew 14.23% in November, the highest since April 2012, the earliest period for which WPI data is available under the current series.
Retail inflation in India rose 4.91% in November compared with a year ago. The rise was far from unprecedented. And of the 119 months for which data is available under the latest series of Consumer Price Index (CPI), inflation has been higher than 4.91% in 70 months.
Retail inflation in India rose 4.91% in November compared with a year ago. (Representational image) (MINT_PRINT)
That statistical comfort notwithstanding, there are growing concerns around price rise in the country. The Wholesale Price Index (WPI), which acts as a proxy for producer prices, grew 14.23% in November, the highest since April 2012, the earliest period for which WPI data is available under the current series.
There are valid reasons to be concerned about inflation, an HT analysis shows. What complicates matters even more is the fact that the current spike has come at a time when the economy has just recovered. Here are three charts that explain this in detail.
The growing CPI-WPI divergence and the policy ghost of a former Chief Economic Advisor’s argument
The past few months have seen a growing divergence between the retail and wholesale inflation. WPI growth was 9.32 percentage points higher in November. While there have been instances of divergence between CPI and WPI even in the past, the latest episode is a first when WPI has surged ahead of the CPI in such a big way. In absolute terms, the difference is similar to at least two episodes for data under the current series (mid-2015 and mid-2020), when CPI was far ahead of WPI. It has to be kept in mind, however, that CPI and WPI are very different in their composition.
While the inflation-targeting framework mandates the central bank to maintain retail inflation within a band of two percentage points from 4%, the government’s former chief economic advisor once tried to subtly argue in favour of a easy monetary policy by citing WPI . In July 2015, Arvind Subramanian, then the chief economic advisor to the Narendra Modi government, wrote an article in the Indian Express at a time when WPI was lagging the CPI to argue that in exceptional times, there was some merit in questioning the prudence of relying solely on CPI for the conduct of monetary policy. “The monetary policy agreement between the ministry of finance and RBI, as well as the Urjit Patel report, has argued, not inappropriately, that the inflation target/objective should be based on CPI. In normal times, that would be completely unobjectionable. But are these normal times, when the price indicators are, frankly, pointing in dramatically different directions?” Subramanian wrote.
If WPI lagging CPI then was good logic for a more accommodative monetary policy in the finance ministry, WPI surging significantly ahead of CPI now should suggest the reverse, namely, a reversal of the accommodative monetary policy stance in force for a long time.
At least one member in this month’s monetary policy committee (MPC) meeting, Jayanth R Varma, expressed reservation on the part of MPC’s resolution that asked for continuing with “the accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy.”
Consumer perception about inflation has been rising
Economic sentiment need not always correspond with numbers. The latest evidence on consumer perception around price rise, as seen in RBI’s Consumer Confidence Surveys (CCS), and the trajectory of the CPI, are a case in point. While headline inflation has actually declined in the past one year, consumer perception of it has taken an opposite trajectory. Net share of respondents who believe inflation has increased is at close to the all-time high seen in late 2012, the earliest year for which data is available in the surveys.
Pandemic’s shock to incomes might have added to inflation’s pain
There is another piece of evidence in the CCS that tells us why the inflationary pain could be greater than in the past, even though the numbers are far from their all-time high levels. It is because the latest price rise has been accompanied by a sharp fall in general income levels in the economy. This is best seen from the net sentiment metric on income levels in the CCS. While this value was positive in late 2012, when net perception about rise in inflation was the highest, it is minus 40.6% in the latest CCS round in November. This, when read with the evidence of a large increase in economic inequality after the pandemic and reports of the economic recovery being driven by profits rather than wages, suggests that a large majority of the population might still be facing an unprecedented double whammy of rising prices and falling incomes.
To be sure, CCS only measures urban sentiment, and we do not have a similar high-frequency indicator for rural areas. However, the fact that food inflation has been lagging non-food prices means that farm incomes are being subjected to squeeze in the terms of trade.
It is this ominous combination of inflation driven by non-food prices along with a widespread fall in income that might have increased the pain of the current inflationary environment. It also underlines the importance of political and not just economic management of inflation for the government, especially as it enters a critical state election cycle early next year.
