Wholesale Price Inflation Surges to 16-Month High

Context

India’s wholesale inflation rose to a 16-month high of 3.4% in June 2024, up from 2.6% in the previous month, driven by a spike in food and manufactured product prices.

Key Highlights

• Wholesale Price Index (WPI) inflation accelerated to 3.4% in June, the highest level since February 2023.
• Food inflation was the primary driver, surging to 8.7% compared to 7.4% in May.
• Manufactured products inflation also rose to 1.43% from 0.8% in the previous month.
• Vegetable prices soared by 38.8%, with onions and potatoes seeing inflation of 93.4% and 66.4% respectively.
• Pulses (21.6%), paddy (12.1%), fruits (10.1%) and cereals (9.3%) also saw sharp price increases.
• Fuel and power inflation remained negative for the fourth straight month at -1.93%.

Reasons for the Surge

The rise in wholesale inflation was broad-based, with multiple factors contributing to the spike:

Food Inflation

• Soaring prices of vegetables, cereals, fruits, and pulses were the primary drivers of the surge in food inflation.
• Vegetable prices, especially for onions and potatoes, saw massive increases of over 38% year-on-year.
• Pulses, paddy, and other food items also witnessed double-digit inflation.
• The spike in food prices was reflected in the rise of retail inflation to a four-month high of 5.08% in June.

Manufactured Products Inflation

• Prices of manufactured products, which make up nearly two-thirds of the WPI index, rose by 1.43% in June compared to 0.8% in May.
• This was the first time manufactured products had returned to inflation since February 2023.
• The uptick in manufacturing costs is likely to put pressure on corporate margins.

Global Commodity Prices

• Rising global commodity prices, particularly for crude oil, also contributed to the wholesale inflation surge.
• Prices of crude petroleum and natural gas increased by 12.55%, the steepest rise in at least six months.
• Minerals prices also saw a 9.6% year-on-year increase, the highest in five months.

Impact and Outlook

The surge in wholesale inflation is expected to have far-reaching consequences for the Indian economy:

Impact on Consumers

• The spike in wholesale inflation has already translated into higher retail inflation, which reached a four-month high of 5.08% in June.
• Consumers are facing the brunt of rising prices, especially for essential food items like vegetables, pulses, and cereals.
• The high inflation is eroding the purchasing power of households and could dampen consumer sentiment.

Impact on Businesses

• The rise in manufacturing costs due to higher input prices is likely to squeeze profit margins for companies.
• Businesses may be forced to pass on the increased costs to consumers, further fueling inflation.
• The high inflation environment could also impact investment and production decisions by firms.

Monetary Policy Implications

• The Reserve Bank of India (RBI) is unlikely to change its policy rate in the near term despite the high inflation.
• Experts believe the central bank will maintain the policy rate at 6.5% for the ninth consecutive time in its August meeting.
• However, the RBI’s stance may change depending on the progress of the monsoon and further developments in global commodity prices.

Future Outlook

While the June inflation data points to continued price pressures, there are some signs that the situation may improve in the coming months:

Easing Global Commodity Prices

• Global commodity prices, including the benchmark CRB index, have seen a continuous dip in recent weeks.
• This could help contain wholesale inflation in the coming months, with Icra forecasting a -2% WPI print in July.

Favorable Base Effects

• The high wholesale inflation in June 2024 was partly due to a favorable base effect, as the WPI had registered a 4.2% deflation in June 2023.
• This base effect is expected to work in favor of lower inflation in the coming months.

Monsoon and Sowing Levels

• Experts believe that better rainfall and improved sowing levels could help ease food inflation in the coming months.
• This, along with the easing of global commodity prices, could pave the way for a moderation in wholesale inflation.

Source: The Hindu

UPSC Mains Practice Question

Q. Analyze the factors contributing to the recent surge in Wholesale Price Inflation (WPI) in India. Discuss its potential impact on the economy and suggest measures to effectively manage and control WPI.

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