Home / Markets / Mark To Market /  Inflation is cooling, but don't celebrate just yet

India’s wholesale price index (WPI) inflation cooled to 11.16%, mirroring the ease in the retail inflation print for July, and adding strength to the argument that price pressures are transient in the economy.

The surge and the drop in WPI inflation that followed it have a large base effect push because of the pandemic.

The outlook for wholesale prices is benign as the month-on-month momentum of WPI is showing signs of easing. Moreover, a favourable base will add to the deceleration. Analysts said WPI inflation may remain in double digits for two-three months and, thereafter, it may taper off.

Two ways to go
View Full Image
Two ways to go

July WPI inflation’s fall was led by a decline in both primary articles and manufactured products. In other words, food inflation cooled, while price pressures in manufactured products remained in check.

The outlook on food inflation is benign. The upcoming kharif harvest may keep prices of cereals under check, and vegetable prices may also ease after the seasonal spike.

Global commodity prices may have reached their peak with the delta variant of covid-19 casting a doubt on economic recovery. Crude oil prices have begun to cool off in recent days.

Inflation in manufactured products may remain under check due to the slack in the domestic economy, according to economists.

But the thing about inflation is that as price pressures ease in some corners, other segments start showing an uptick. For instance, core WPI inflation has inched up slightly with prices of manufactured goods such as machinery and transport equipment showing an increase, analysts at Barclays Securities (India) Pvt. Ltd point out. As such, from automakers to bakers, most firms have begun to flag input cost pressures and it is only a matter of time that companies begin to pass on the costs to consumers.

That brings us to what may happen to retail inflation. Perhaps the biggest push for consumer price index (CPI) inflation would be the ability of producers to pass on rising input costs as demand begins to pick up.

With restrictions on economic activity slowly ebbing and a festival season just around the corner, firms big and small would merrily pass on their input cost pain to consumers with price hikes.

Services inflation is likely to inch up as the last leg of the economy opens up. Ergo, these factors would offset any salutary effects of a fall in food inflation or even global commodity prices.

“India’s inflation is being driven by non-domestic factors, limiting policy options and squeezing profit margins. As a result, even if imported price pressures recede, margin normalization may keep CPI inflation relatively elevated and sticky," said the Barclays report.

The upshot is that the gap between WPI and CPI inflation may begin to narrow. But unlike in the past, this time the narrowing may not be good news.

Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Never miss a story! Stay connected and informed with Mint. Download our App Now!!

Edit Profile
My ReadsRedeem a Gift CardLogout