Home / Markets / Mark To Market /  If wholesale inflation is soaring, can retail inflation be far behind?

Indian consumers have begun to feel the familiar pinch of inflation more acutely even as producers continue to complain that rising prices are eroding their profits. Mobile tariffs are being hiked, cement prices are on an upswing and most consumer goods may only get more expensive in the coming months.

At the macro level, this means that consumer price index (CPI) inflation would soon trend up to narrow the gap with wholesale price index (WPI) inflation. As the adjoining chart shows, the gap between the two indices has grown significantly in recent months with the WPI more than eight percentage points higher than the consumer index in October.

Mind the gap
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Mind the gap

The WPI’s surge in recent months has been entirely driven by non-food inflation—specifically price pressures in fuel due to the surge in global commodity prices which were a direct outcome of supply chain disruptions. Manufactured goods prices, too, have contributed to the rise in WPI. The upshot is that persistently high WPI inflation leaks into consumer prices soon enough through price hikes.

In the past, consumer price inflation has risen to meet WPI as companies have been eager to pass on the costs. Analysts have already begun to warn of inflation in the coming months, although retail inflation may get some cooling effect from food prices. Even here, prices of cereals, vegetables and edible oil have already begun to climb.

The key difference between past high WPI inflation which got transmitted to retail inflation and the present episode is weak demand. Indeed, companies have been careful with price hikes, making them piecemeal so as to not hurt the fledgeling recovery in demand. Demand is yet to show signs of sustainability. The lack of it, though, won’t be a wedge between wholesale and retail inflation for long.

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