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Explained: Why is wholesale inflation soaring and consumer inflation rangebound

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The wholesale price inflation (WPI) index for November jumped to a 12-year high of 14.23%. Through this explainer, we look at the contributing factors and the implications of high WPI.

Explained: Why is wholesale inflation soaring and consumer inflation rangebound
The wholesale price inflation (WPI) index for November jumped to a 12-year high of 14.23 percent, reflecting the sustained rise in commodity prices. On the other hand, the consumer price inflation (CPI) has been relatively benign.
Through this explainer, we look at the contributing factors and the implications of high WPI.
What does the wholesale price inflation index imply?
WPI is the price that wholesalers (factories) pay. A rise in the index means that factories are having to pay more for raw materials.
Why is WPI rising?
In a nutshell—due to rising prices of commodities. There is a base effect at work too. Last year in 2020, WPI was negative (ie prices were falling) between April and August because factories were shut because of the lockdown and there was little or no production.
However CPI has been benign even as WPI is rising. Why the disconnect?
There is a base effect at play in the case of CPI as well, which is making the number look benign, though consumers are hurting. For most of 2020, CPI was around 6 percent due to local shortages caused by poor goods movement and lack of labourers.
Another reason for the disconnect is the composition of the two indices.
WPI has a lot of weightage for what factories buy: metals, chemicals, plastics, rubber. CPI has none of these. On the other hand, CPI has a lot services: medical, health, recreation, whose prices move more slowly.
But there are anomalies for sure. Power prices are shown are rising in WPI for Nov, but shown as falling in CPI for November.
Still, if wholesale prices are rising, consumer prices too would reflect that before long. No?
Wholesale prices are driven by fund movements in the commodity market which in turn are driven by global factors. Hence wholesale prices are more volatile. Often wholesalers don’t pass on all their price hikes to the retailer because of contracts, or because they expect the price rise to be temporary and don’t want hurt the customer, and thereby demand.
How worried should consumers be by the high WPI number?
High WPI inflation is a worry. If commodity/wholesale price remain high for too long, producers will pass it on to the consumers
What are the implications of WPI for the economy, industry, investor and consumer?
WPI hits the productive sector: factories mostly. It has on equity investors in the sense margins of companies take a hit when they don’t pass on high raw material prices to consumers. WPI has a delayed impact on consumers, if it persists
How can government control high WPI?
Government can control the WPI only through taxes: customs duties and GST. In the event of a steep rise in crude GOI cut excise on fuels. But there is a limit to which governments can cut taxes. They too have salaries to pay
Should the RBI go back to using WPI as the benchmark for setting interest rates?
RBI would never do that. World over CPI is the index targeted by monetary authorities, because that’s the index affecting the common man for better or worse.
India up until 2008 was following WPI because the consumer affair ministry put it out weekly. CPI was announced by the MOSPI, and monthly at that. This led to serious distortions in policy making and in market reaction.
The government and RBI got together, ensure WPI is changed from weekly to monthly announcements, and then via the Urjit Patel committee on inflation targeting, ensure that monetary policy only speaks to CPI.
This move from WPI to CPI as the policy anchor has brought us to global best practices. Going back to WPI would be regressive and uncalled for.
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