A revision of the wholesale price index (WPI) and the consumer price index (CPI) could reduce the weight of food and fuel products – which have turned substantially dearer in the past few months – in the price gauges and, thus, show lower inflation prints for recent months when these are revised on the basis of the new series, official sources said. However, economists say while an easing in inflation can’t be ruled out, subject to the changes in the weight of the items and the composition of the product baskets in the new indexes, price pressure for recent months may still remain “unpalatably high”.
Retail inflation breached the upper band of the central bank’s medium-term target of 2-6% for a fifth straight month and stood at 7.04% in May. Wholesale price inflation, meanwhile, hit an over 30-year high of 15.88% in May, having remained in the double digits for 13 months now. Food products dominate the CPI, which the central bank targets, and make up 45.86% of this index, while fuel & electricity has a 7.94% weight. In the WPI, primary food articles account for 15.26% and fuel & power 13.15%.
To be sure, economists don’t expect any revision of the CPI before late 2024 or early 2025, as the new consumption expenditure survey – on which the CPI product basket and weight will be based – will be completed only by June 2023.However, a revised WPI, with 2017-18 base year, is expected to be out soon. The base year for the extant CPI series is 2012 and for the WPI series, it’s 2011-12.
Aditi Nayar, chief economist at Icra, said: “A reduced weight of food and fuels could result in a downward revision in some of the recent inflation prints. Nevertheless, the core-CPI and core-WPI inflation has been sticky at an elevated level as well for the last several months, and therefore the headline prints could still remain unpalatably high.”
India Ratings chief economist DK Pant said, “While food and fuel inflation is contributing to overall CPI inflation, inflation for miscellaneous goods and services from November 2020 to April 2022 was higher than the headline retail inflation. A lot will depend on new commodities that will be added to the consumption basket and their price movement. Modification in the consumption basket and weighting diagram will present the true picture of current inflation.”
As for the WPI, it’s dominated by manufactured products and in all four quarters of FY22, the price pressure in this segment was lower than headline WPI inflation. “Prima facie, this gives an impression that lower food and fuel weight in the WPI may lead to lower headline inflation. Here also if the weight of commodity groups showing high inflation currently – including textiles, paper and paper products and basic metals – is greater in the new index than the extant one, it may lead to higher WPI based inflation,” Pant added.
Yes Bank chief economist Indranil Pan said, “On one side, it may be true that the contribution of food inflation to overall inflation is expected to come down if the weight of food in the new index is lowered. However, on the other hand, the weight for some other items has to go up so that the cumulative weight adds up to 100.”
“In this context, there is a likelihood that the weight of the services sector can go higher. The services sectors such as transportation etc. could boost inflation then. Other services such as gardening, barber services, etc, have recently seen increase in prices and a higher weight there could be a negative for the headline CPI inflation. In the WPI, the weight for food is lower than in the CPI. However, the WPI has a larger weight for industrial inputs such as metals, etc, and with global commodity prices remaining on the higher side, it could add to pressures for the Headline WPI inflation,” Pan said.