High CPI inflation, falling WPI inflation show pressure on households, cheer for industry; where’s money going

An uncomfortable rise in the CPI inflation and a falling WPI inflation shows the rising pressure building up on households and individuals, while boosting corporate margins. The data shows that retail inflation surged in January and February mainly due to surge in prices of food and other household goods and services. At the same time, wholesale inflation has fallen sharply because of cheaper raw materials and cheaper fuel. The retail inflation in February was 6.44%, slightly lower than in January but still above the RBI’s target range of 2-6%. On the flip side, wholesale inflation fell to a 25-month low of 3.85%.

According to analysts the main reason behind the divergence between CPI and WPI is the difference in the weightage of the food basket and fuel prices. “ Food prices have been high due to cereals, milk, fruits, spices, etc. which reflects in CPI inflation… With global energy and metal prices cooling off from their highs, WPI inflation has been falling,” said Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities.

Why is CPI inflation rising but WPI falling?

“The two major reasons for the divergence of CPI and WPI are upward price pressure on cereal, spices and dairy products. CPI has a 40% weight of the food basket while WPI has a lower weight of 15.2%. Therefore, the rising food inflation is more visible in the CPI index than in the WPI. The second reason is the persistently high inflation in certain services, household goods and personal care categories, which are not included in the WPI basket,” said Vijay Kalantri, Chairman, MVIRDC World Trade Center Mumbai.

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“Apart from food inflation, the widening difference is due to fuel prices having higher weightage in WPI as compared to CPI. Consumer price inflation considers the changes in the prices of services, while WPI doesn’t capture the same,” said Arvinder Singh Nanda, Senior Vice President, Master Capital Services Ltd.

Another rate hike on cards

“The significant disparity between the WPI and CPI data should be noted since they reflect fundamentally different index compositions. We can expect one more rate hike while the RBI seeks to hunt down inflation, followed by a protracted hiatus,” said Akshat Garg, Manager – Research at ChoiceWealth. CPI remaining above the RBI’s upper band of 6% is a matter of concern. The MPC is likely to raise policy rates by 25 bps in the next policy meeting,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Impact of rising CPI inflation on economy

High food inflation to affect consumption in economy

“The rising cost of food, clothing, household rent and other consumer essentials may affect overall discretionary consumption in the economy as an average middle-class family spends a substantial portion of its income on these goods. If the high food inflation persists in the coming months, it will affect consumption in the economy, which accounts for more than 55% of our GDP,” said Vijay Kalantri.

February CPI may have wide-ranging impact on economy

“The rise in CPI in February is going to have a wide-ranging impact on the Indian economy, as the RBI monetary policy is based on the principle of inflation targeting. The current trend in prices indicates that price rise is not merely transitory on account of supply-side constraints but needs long-term support and a balanced approach on the part of all the stakeholders,” said Jyoti Prakash Gadia, Managing Director at Resurgent India.

Interest rate hike can make credits costlier and dampen consumer demand

“The rising CPI figures can have an adverse impact on the economy as it increases the cost of living resulting in lowering the purchasing power of the consumer. This can further impact the government’s finances negatively. Mounting inflation can compel RBI to raise interest rates to curb inflation which can hamper economic activity by making credits costlier for business and could dampen consumer demand,” said Arvinder Singh Nanda.

Benefits of cheap raw materials likely to get passed on to consumers

“Corporate margins and earnings could get a boost if they hold on to their product prices while the raw material prices correct. But this is unlikely, given the slowdown seen in consumption across sectors post-Diwali. The benefit of lower RM prices is likely to get passed on to consumers over the next 2-3 quarters. However, food inflation remains a challenge due to the unfavourable weather conditions and forecast of below normal monsoon,” said Mitul Shah, Head of Research at Reliance Securities.