WPI inflation offers a breather; eases to a 5-month low in July

Written by Express news service | New Delhi | Updated: Aug 14 2014, 23:59pm hrs
InflationInflation eases to 5.19 per cent in July as against 5.43 per cent in June.
Even as retail inflation for June recorded a worrying surge, the wholesale price index (WPI)-based inflation dipped to a five-month low of 5.19 per cent in July. The year-on-year headline WPI reading was 5.43 per cent in the previous month.

Inflation had stood at 5.85 per cent in July, 2013.

The consumer price index (CPI) inflation data for July, released earlier this week, had surged to 7.96 per cent as against 7.46 per cent in June.

The dip in the WPI inflation in July, which was released by the government on Thursday, was despite food inflation rising to 8.43 per cent in July from 8.14 per cent in June.

The divergent movements of the CPI and WPI readings is largely on account of the higher weightage of food items in CPI-based inflation as against the WPI -- food items constitute over 45 per cent weight in CPI, their weight in WPI is just 14.34 per cent.

Inflation in vegetables declined 1.27 per cent, and for onion it was (-)8.13 per cent on an annual basis in July, as per the WPI data. However, potato prices surged 46.41 per cent and fruits 31.71 per cent during the month. Rate of inflation in milk was 10.46 per cent.

Inflation in the egg, meat and fish category stood at 2.71 per cent in July as against 10.27 per cent in the previous month.

Inflation in the manufactured products was at 3.67 per cent, and non-food articles, which include fibre, oil seeds and minerals, at 3.32 per cent. Inflation in the fuel and power category, meanwhile, was down at 7.40 per cent from the previous month.

The WPI inflation data was revised upwards for May to 6.18 per cent, from 6.01 per cent as per provisional estimates.

REACTIONS

Even after factoring in the price rise of vegetables, the impact on the WPI inflation was much lesser than it was for the CPI. This is because the key item of the price inflation in vegetables for July, namely tomatoes, was not a part of the accounting under WPI for July. This is because the WPI follows a seasonal based approach in pricing of seasonal crops such as mangoes, peas, tomatoes etc. where the price quote is available only in the period when the fresh crops arrive in the markets and not during the sowing season of these crops. With the importance of the WPI going down for policy making purposes, we do not expect any implication of the drop in WPI for the monetary policy. RBI, in our opinion, will continue to remain guarded against the retail price rise risks that can come though aggregate demand shifts or implications of poor monsoons on agriculture. RBI is thus expected to maintain a status quo so far as its monetary policy is concerned, said Indranil Pan, Chief Economist, Kotak Mahindra Bank Limited.

"It is encouraging to note the softening in the pace of WPI. However, it is too early to expect any major downshift in the inflationary rate. It is surprising to note that vegetable wholesale prices have declined as compared to the previous year, by 1.3%. At the retail level, vegetable prices grew by close to 17% in July 2014. This is an indication of the supply and distribution bottlenecks that have contributed heavily to the prevailing food inflationary situation in India, perhaps more than even deficient monsoons. Major fiscal reforms are required to address such issues, and we are hopeful the new government would take positive measures," says Debopam Chaudhuri, Chief Economist, ZyFin Research.

India's WPI inflation hits 5-mth low, price pressures simmer

(Reuters) India's wholesale price inflation eased to a five-month low in July, helped by a moderation in fuel costs, but soaring prices for vegetables and fruit are likely to fuel inflationary pressures following the weak start to monsoon season rains.

Adding to inflationary worries are a weak currency and lingering uncertainties over global crude prices due to conflicts in Ukraine and the Middle East. Since its 2014 high, hit on May 23, the rupee has shed 4.7 percent.

Thursday's data comes days after retail inflation hit a two month high, validating the central bank's decision to keep interest rates high despite the broader economy's need for some stimulus to put momentum back in lacklustre growth.

The wholesale price index (WPI) rose 5.19 percent year-on-year last month, its slowest pace since February, and compared with a 5.10 percent annual rise forecast by economists in a Reuters poll. In June, prices rose 5.43 percent from a year earlier.

Surging costs for vegetables, fruit and milk led to a faster-than-expected 7.96 percent on year rise in retail prices in July, a government data showed on Tuesday. Poor rains in some parts of the country has pressured food prices and vegetable prices, for example, are up 68 percent since March.

The central bank wants to reduce retail inflation to 6 percent by 2016. It held rates unchanged last week, in a policy review that cited the risk that inflation could increase due to the weak start to the monsoon.

"It is too early for the RBI to draw any comfort," Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai, said. "They are likely adopt a wait and watch approach for now."

Rains improved last month, and there are forecasts for a stronger second half to the four-month monsoon season running from June through September.

But, the central bank's determination to tamp down price pressures have dampened market expectations for a rate cut before the first half of next year.

Prime Minister Narendra Modi, elected in May amid anger over persistently high inflation, particularly food inflation, has made cooling prices a top priority for his administration.

He has ordered a crackdown on hoarding, and set limits on the export of staples, such as onions and potatoes. But analysts say these measures, at best, can provide brief relief, and cannot fix a dilapidated supply system controlled by middlemen.

India is the world's second-biggest producer of fruit and vegetables after China, but it battles chronic shortages as an estimated 18 percent of the crop goes to waste every year due to inadequate cold storage and refrigerated transport facilities.

New Delhi estimates it needs to invest $9 billion in the cold supply chain by March 2016 to handle growing output of fruit and vegetables. That is more than 10 times the $822 million allocated in Modi's maiden budget last month, and far more than the government can afford.