Why are wholesale prices falling when retail inflation is climbing to alarming levels: EXPLAINED

Food items have only 24.38 per cent weight in WPI, whereas those weigh more than 45 per cent in the CPI.

Even as retail inflation soared to near 7 per cent in the month of July, wholesale prices continued to contract for the fourth month in a row. WPI inflation stood at -0.58 per cent in July, according to the Ministry of Commerce & Industry. Though the wholesale food inflation significantly rose in the month, it did not bring major changes in the overall wholesale prices as it did to the retail prices. Food items have only 24.38 per cent weight in WPI (wholesale price index), whereas those weigh more than 45 per cent in the CPI (consumer price index — the measure of retail inflation). This is one of the major reasons why high food prices do not affect WPI as much as it affects the CPI.

WPI inflation in June was at (-)1.81 per cent, while for the month of May and April it was (-)3.37 per cent and (-)1.57 per cent respectively. Also, the WPI Food Index rose 2.73 per cent in May,  3.05 per cent in June, and 4.32 per cent in July 2020. “Domestic food inflation remains elevated across most economies since the onset of the pandemic. A more favourable food inflation outlook may emerge as the bumper rabi harvest eases prices of cereals, especially if open market sales and public distribution offtake are expanded on the back of significantly higher procurement,” RBI said in its August bulletin.

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Supply disruptions on the retail side are also believed to have swelled up the retail inflation in the country. Upside risks to food prices remain and the abatement of price pressure in key vegetables is delayed and remains contingent upon normalisation of supplies, RBI added. The Reserve Bank of India’s Monetary Policy Committee expects that headline inflation will remain elevated in Q2 FY21, but may ease in H2 FY21, aided by favourable base effects. The central bank has cited two main reasons — the spike in food prices and cost-push pressures — for high headline inflation.

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Meanwhile, given the uncertainty surrounding the inflation outlook and extremely weak state of the economy amid the coronavirus crisis, the MPC had decided to keep the policy rate on hold, while remaining watchful for a durable reduction in inflation to use available space to support the economic revival.