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(Photo: AFP)
(Photo: AFP)

WPI, CPI food inflation gap should narrow to ease central bank’s worry

  • Consumer price index inflation was a worrying 6.69% in August, within which food inflation was 8.4%
  • Removal of supply-side disruptions is imperative for headline CPI inflation to come down

The Reserve Bank of India (RBI) has found itself at an uncomfortable place of facing inflation again at a time when the economy is feared to shrink by not less than 9%.

As in the past, food has been a major contributor to inflation this time as well. Consumer price index (CPI) inflation was a worrying 6.69% in August, within which food inflation was 8.29%.

Food has a large weightage in the inflation indices, be it wholesale or retail index. Ergo, the policy implications of food inflation cannot be ignored given that RBI is now an inflation-targeting central bank.

What should worry policymakers is the wide gap between food inflation at the wholesale level and that at the retail level.

As the adjoining chart shows, the gap has widened considerably of late. The food index in the wholesale price index (WPI) inflation rose just 4% year-on-year in August, as against the massive 8.29% rise in CPI food index.

“The difference between WPI food and CPI food shows us the supply side issues. The gap between the two should narrow, which would mean supply side logistics are getting smoothened out," said Pranjul Bhandari, chief economist at HSBC.

At the wholesale level, food prices had collapsed during the lockdown in April and May and then climbed back up in the ensuing months. This was expected, given that a nationwide lockdown meant that goods and services could not reach the end consumer.

Add the fact that food is perishable and it is easy to see why farmers would slash prices.

At the same time, lack of availability rendered food expensive at the retail level, as reflected in the elevated food inflation in the CPI index.

But even after the nationwide lockdown has been lifted, the benefits of low wholesale food inflation has not flowed to the retail consumer. Regional lockdowns have made things challenging.

This should matter to the central bank because its mandate involves managing headline retail inflation.

Ergo, even if food prices are ultra low at the wholesale level, RBI cannot ignore the high retail inflation. Removal of supply-side disruptions is imperative for headline CPI inflation to come down.

Economists are hopeful that food inflation at the retail level would cool off in the coming months. But much of this is expected to ride on the statistical base effect. That would mean that price pressures would still lurk in the economy.

For the central bank, responding to growth would be that much more challenging.

The central bank’s deputy governor, Michael Patra, had said that food inflation is the “true core" of inflation dynamics.

Even as worries over core inflation persist, food prices could become the migraine the central bank didn’t wish for.

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