Record WPI inflation: Supply chain issues, stiffer prices may hit retail

Buildup of pricing pressure amid supply chain disruptions against the second wave of the Covid-19 pandemic also contributed to the rise in inflation at wholesale level.

Wholesale price index-based inflation surged to an all-time high of 10.49 per cent in April due to a low base effect amid rising food and commodity prices. Buildup of pricing pressure amid supply chain disruptions against the second wave of the Covid-19 pandemic also contributed to the rise in inflation at wholesale level.

Going ahead, both wholesale and retail inflation are expected to rise further. Retail inflation, which had eased to a three-month low of 4.29 per cent in April from 5.52 per cent in March mainly due to lower food prices, is expected to pick up as the impact of wholesale inflation will pass through in terms of higher prices at the level of consumers.

The spread of the virus in the hinterland is expected to lead to more supply chain disruptions at the primary mandi level which may dampen the multiplier impact of a good harvest this year following forecast of a normal monsoon, raising the spectre of high food inflation.

The low base of April last year, when WPI inflation was (-) 1.57 per cent, also contributed to the spike in April 2021. WPI inflation was 7.39 per cent in March 2021.

Economists said the 4.9 per cent inflation in food articles was at a six-month high and data shows a greater impact of supply chain disruptions at the wholesale level. “Interestingly, in sequential terms, the WPI-food recorded a sharp 3.8 per cent MoM increase in April 2021, as compared to a relatively limited 1 per cent uptick in the CPI-food index, suggesting a greater impact of supply chain disruptions at the wholesale level,” Icra chief economist Aditi Nayar said.

Further, the rise in prices of commodities such as minerals, edible oil, crude oil, coal, fertilisers, plastic, basic metals, electrical/electronic items, auto and auto components — having a weight of about 44 per cent in the WPI — too contributed to the rise in inflation.

“Since the global prices of these items are mostly a pass through into domestic prices, a surge in global commodity prices have put significant pressure on the headline wholesale inflation. In fact, the contribution of these items to the headline wholesale inflation increased to 72.6 per cent during February-April 2021 from negative 34.4 per cent during September-November 2020,” Sunil Kumar Sinha, principal economist, India Ratings & Research said.

Inflation in food articles in April was 4.92 per cent as prices of protein-rich items like egg, meat and fish hardened. Inflation in this basket was 3.24 per cent in March 2021. This was led by 10.88 per cent inflation in ‘egg, meat and fish’ basket during April, 10.74 per cent in pulses and 27.43 per cent in fruits.

Inflation in the fuel and power basket was 20.94 per cent in April, while in manufactured products it was 9.01 per cent.

Nayar said headline WPI inflation is expected to rise further to 13-13.5 per cent in the current month before commencing a downtrend, whereas the core WPI inflation may continue to rise over the next three prints to a peak of around 10.5 per cent.

This would not leave much space for rate cuts from the Reserve Bank of India (RBI), even though the monetary stance is expected to remain accommodative. Nayar said “growing divergence in terms of the global optimism related to the vaccine rollout” are also pushing up commodity prices.

RBI Governor Shaktikanta Das had earlier this month said that manufacturing and services PMIs along with rising WPI inflation show a persistence of input price pressure. Also, the build-up in input price pressures across sectors, driven in part by elevated global commodity prices, remains a concern. “The inflation trajectory over the rest of the year will be shaped by the Covid-19 infections and the impact of localised containment measures on supply chains and logistics,” Das had said.

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