Graphic: Mint
Graphic: Mint

The narrowing gap between wholesale and retail inflation

With the gap between CPI and WPI narrowing, consumer goods-producing firms' operating margins are likely to be squeezed, analysts say

Inflation as measured by the Wholesale Price Index (WPI) hit a 23-month high of 3.55% in July. Interestingly, as the accompanying chart shows, the gap between WPI-based inflation and Consumer Price Index (CPI)-based inflation has been narrowing.

What is the implication of this?

Firms, especially those that produced consumer goods, benefited from falling raw material prices even as they reaped the benefit of a rise in consumer prices.

Axis Bank chief economist Saugata Bhattacharya points out that this led to high operating margins. Now, with the gap between CPI and WPI inflation narrowing, those operating margins may be squeezed.

Independent economist Gaurav Kapur says that the bottom in commodity prices is now behind us and hence the rise in WPI inflation.

Another implication could be higher CPI inflation in future, as the rise in WPI inflation works its way into consumer prices, explains Bhattacharya.

And a third outcome could be a reduced chance of further rate cuts. Some commentators had earlier criticized the Reserve Bank of India for not cutting interest rates since inflation according to WPI was in the negative territory. That argument no longer holds true. Madan Sabnavis, chief economist at CARE Ratings, says the prospects of a rate cut would get dimmer in the near term.

Some economists say this trend would sustain. Core WPI inflation may continue to rise, pushing up headline inflation, which would considerably narrow the gap between wholesale and retail inflation in the second half of fiscal year 2017, rating agency Icra Ltd said in note.

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