WPI inflation hits 30-year peak of 15.88% in May

Wholesale price inflation spiked to 15.88% in May, the highest since September 1991 as a surge in price pressure in food and fuel overwhelmed a moderation in the dominant manufactured product segment. In April, the WPI inlfation was recorded at 15.08%.

Inflation based on the wholesale price index (WPI) has remained in double digits for 14 months now, mirroring elevated global commodity prices, especially of oil, according to the official data released on Tuesday.

Analysts expect WPI inflation to remain elevated in June as well, as a waning base effect, further rise in Indian crude oil basket (it hit a 10-year high on June 9) and a weak rupee will likely offset any direct or indirect impact of the government’s move to cut fuel taxes and ease supply-side bottlenecks (the first monthly impact will be reflected in the June data). Much will also hinge on the progress and distribution of monsoon showers.

The WPI inflation far outweighs price pressure in retail inflation, which, in fact, eased to 7.04% in May from a 95-month peak of 7.79% in April. The divergence, the highest in six months, is mainly due to the different composition of the two price gauges (food items account for as much as 46% of the consumer price index). Still, the sharp rise in the WPI adds to uncertainties around the overall inflation outlook and raised the possibility of another round of rate hike in August.

Inflation in primary articles, led by food items, jumped the highest in the current WPI series (with 2011-12 base) to 19.71%, while price pressure in fuel and power, comprising petrol, diesel and LPG, accelerated second fastest in the current series (40.62%). Primary food inflation climbed to 12.34% in May from 8.35% in April, driven substantially by a massive 56.36% spike in vegetable prices. Interestingly, inflation in wheat, exports of which were banned last month, eased to 10.55% from 10.70% in April.

Unsurprisingly, inflation in crude petroleum and natural gas jumped to 79.50% in May from 69.07% in the previous month.
However, core inflation eased to 10.4% in May from a four-month peak of 11.1% in the previous month, as price pressure in manufactured products moderated to 10.11% from 10.85%, albeit on a somewhat conducive base.

Nevertheless, as Icra chief economist Aditi Nayar said with inflation in industrial raw materials remaining stubbornly entrenched, core inflation will likely remain elevated above 9% over the next few months.

The rise in energy prices and the depreciating rupee (the latter will augment the landed cost of imported goods) pose upside risks to the headline WPI inflation in June. “Consequently, we expect the WPI inflation to remain elevated at about 15-16% in June,” Nayar said. The depreciating rupee and the hardening of crude oil would transmit faster to the WPI than the CPI, she added.

“The rise in the WPI inflation, in contrast to the easing in the CPI inflation in May 2022, may imbue some caution into the outlook for monetary policy actions. We continue to expect 60 basis points of repo hikes over the next two policy reviews,” Nayar said.

Given the sustained rise in costs of raw materials and intermediate goods (these products dominate the WPI), producers in a larger number of sectors may be forced to pass on the increase in prices to consumers, despite relative slackness in aggregate private demand.

Within the manufactured products segment, price pressure in edible oils, which are mostly imported, eased to 11.41% in May from 15.05% in April, having moderated for a second straight month. Despite moderation, inflation in basic metals and semi-finished steel remained in double digits. However, price pressure in chemicals and textiles worsened, reflecting the rise in input prices.

Economists at India Ratings wrote, “Higher input costs is having a widespread impact as even capital intensive industries like machinery and motor vehicles registered inflation of 6.05% and 6.11% in May, which is a six-month and 104-month high respectively.” They expected WPI inflation to remain “firm and in double digits in the foreseeable future”. This, in turn, will likely pressure retail inflation, they added.