We now have both retail and wholesale inflation numbers for February. While the Consumer Price Index (CPI) grew at 5.1% in February, the Wholesale Price Index (WPI) rose by just 0.2%. To be sure, the CPI and WPI baskets are very different in composition, and the difference in the two inflation measures is better understood as inflation facing consumers and producers, rather than inflation of similar commodities in the retail and wholesale markets. The CPI basket, for example, has a
The core inflation environment in both consumer and producer markets is at extremely benign levels
The core inflation environment in both consumer and producer markets is at extremely benign levels
Because CPI is the benchmark inflation rate under India’s inflation targeting framework, and it continues to be higher than RBI’s target of 4%, the Monetary Policy Committee (MPC) of RBI is likely to retain its hawkish tone on inflation in the economy. While MPC is technically right in expressing this hawkish tone, a reading of core inflation – inflation excluding the food and fuel components – in both the CPI and WPI baskets shows that the inflation situation is among the most benign it has been in the current CPI and WPI series. While core CPI inflation in February fell for the eighth consecutive month to reach 3.4%, the third-lowest monthly value in the current series, core WPI has actually been contracting every month in the last one year. Subdued core inflation numbers for CPI and WPI suggest that systemic price pressures, which are more likely to reflect overheating in the economy, are really weak in the Indian economy at the moment. Disinflation in core WPI suggests that prices of industrial inputs have been falling rather than rising.
But the food part of both CPI and WPI baskets continues to be high
This is the source of worry for both the monetary and fiscal policy arms of the establishment. The food component of CPI -- it has a weightage of 39% -- grew at 8.7% in February 2024. This number has been 8% or more in every month since July 2023, when it jumped to 11.5%. The food component of WPI -- it accounts for 24% of the overall basket -- grew at 4.1% in February, which is not as high as the CPI food print but significantly higher than the overall WPI print. Though the food part of the WPI basket is unlikely to drive up the overall index, it does point towards tailwinds for retail food prices from the wholesale markets, which, simply speaking, are a manifestation of supply-side pressures in food markets.
And a disaggregation of WPI food underlines supply side pressures from farms rather than factories
This is an important aspect of the current food inflation problem. Because not all food products are freshly grown, it is possible to have high food inflation when manufacturers rather than farmers are driving food prices. The WPI food basket allows us to get an idea about this as it classifies food products into primary articles (freshly grown) and manufactured food products. The disaggregation shows that the headline food inflation print of WPI is driven by high inflation for primary food items rather than manufactured food products. In fact, monthly inflation for the manufactured food component of the WPI basket has been contracting for a year now. The primary food article part of the WPI basket saw an inflation of 7% in February 2024 which is almost the same as the 6.9% level seen in January.
The numbers shown here clearly show that the future trajectory of inflation, and therefore, the prospect of a cut in the interest rate, is contingent on the prospect of farm prices coming down more than anything else. While the government’s aggressive interventions in food markets have prevented this problem from going out of hand, a long-term solution to this problem will require a deeper engagement with agriculture’s resilience to climate shocks
{{^htLoading}}{{/htLoading}}{{#usCountry}}{{/usCountry}} 