WPI inflation spikes to a 27-month high in Feb owing to costlier food, fuel

The wholesale price index-based inflation doubled to a 27-month high in February, led by soaring fuel prices and an uptick in food prices. This effectively dims hopes for any policy rate reduction in the near term to spur economic growth amid the pandemic.

Wholesale inflation rose to 4.17 per cent in February as against 2.03 per cent in the previous month, data released by the ministry of commerce and industry showed on Monday. Its retail price counterpart, consumer price index released on Friday, also saw inflation surge to a three-month high of 5.03 per cent in February, on the back of sharp rise in petrol and diesel prices.

“The doubling in the WPI inflation to a 27-month high was fairly broad-based, reflecting the rise in commodity prices brought on by the global risk-on sentiment, hardening of crude oil and fuel prices, as well as a fading of the favorable base effect for food items,” said Aditi Nayar, principal economist, ICRA Ratings who expects large upticks in the WPI inflation over the next three months with core and headline WPI rising to around 6 per cent in March. “We maintain our view that inflation dynamics will rule out any further rate cuts, with a status quo expected through 2021,” added Nayar.

Food index in February 2021 rose to 3.31 percent, compared to a 0.26 per cent contraction seen in the previous month. Inflation in pulses remained elevated at 10.25 per cent, while that for fruit shot up significantly to 9.48 per cent.

Fuel and power, which has a weight of 13.2 per cent in the WPI, saw inflation up at 0.58 per cent, from a 4.78 per cent contraction in January. The rate of price rise in petrol shot up to 0.83 per cent from a contraction of 10.29 per cent in January. The WPI inflation in diesel was up at (-)0.11 per cent from (-) 13.65 per cent in the previous month.

Crude petroleum inflation rose to 7.18 per cent in February compared to 10.3 per cent contraction in the previous month.

Manufactured products, which account for 64.23 per cent of the index, saw inflation rise to 5.81 per cent in February from 5.13 per cent in the previous month on a year-on-year basis.

The core inflation rose further to a series high 5.5% in February 2021. “While the pace of month-on-month increase tempered, benefitting from the sequential dip recorded by basic metals. Nevertheless, we expect the core inflation to continue to chart an uptrend until May 2021,” said Nayar of ICRA Ratings.

Economists feel there is no further room for rate cuts by the monetary policy committee of the Reserve Bank of India in the current cycle.

The MPC is scheduled to meet in the first week of next month. The RBI in a report on currency and finance (RCF) for the year 2020-21 said that the inflation target of 4 per cent with a +/-2 per cent tolerance band, is appropriate for the next five years.

In its February review, the MPC had suggested that the Union and state governments reduce taxes on petroleum products to provide some relief to customers, who are paying record high prices for petrol and diesel.

Finance Minister Nirmala Sitharaman had said the issue of tax burden on petroleum products was something that the Centre and states had to discuss as both drew revenue from these items.