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Home >Markets >Mark To Market >WPI inflation’s surge in March goes beyond base effect math

Wholesale price index (WPI) inflation was expected to show a spike in March simply because of a low statistical base, as it was a mere 0.42% in March 2020. But the surge to 7.39% has come as a nasty surprise, and economists believe this does not bode well for the inflation trajectory going forward.

The rise in WPI inflation was led by non-food articles. From fuel to manufactured products, the increase has been broad-based outside of food.

The low base resulted in crude, petroleum and natural gas inflation of 32%, while other fuel and power inflation was 10.25%.

It should be noted that crude, petroleum and natural gas inflation was in the negative zone up until February.

Soaring ahead
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Soaring ahead

Manufactured goods inflation was 7.34%, a clear indication that pricing power among producers has strengthened notwithstanding the pandemic-induced slack in the economy.

But there is more to the rise in WPI inflation than the base effect. The month-on-month rise in fuel inflation and that of manufactured products has increased, which indicates an increase in momentum.

Analysts at Icra Ltd point out this increase in momentum and flag off risks in the form of a depreciating rupee.

“The depreciation in the INR will push up the landed cost of imports, adding to the inflationary pressures for the WPI going forward," wrote Aditi Nayar, chief economist at the rating agency, in a note.

Rahul Bajoria, chief economist at Barclays Securities (India) Pvt. Ltd, believes that the base effect may lead to double-digit WPI inflation by May.

What does this mean for the Reserve Bank of India (RBI)?

The RBI has to ensure that retail inflation remains within the 2-6% flexible inflation target. To that extent, the central bank need not be alarmed by the surge in WPI inflation.

What’s more is that the correlation between consumer price index (CPI) and WPI has been weak. In brief periods, both the indices have shown divergent trends as well.

Bajoria believes that the rise in core WPI inflation would have a limited effect on core CPI inflation. “Data released last week showed that CPI inflation has likely reached a near-term peak," he wrote in a note.

Even so, the RBI cannot ignore the WPI inflation as, ultimately, it would seep into retail prices to some extent. Episodes of persistent rise in WPI inflation have resulted in retail inflation going up eventually.

Therefore, this is an added trouble for the RBI.

A weakening currency, hardening global commodity prices and potential supply disruptions due to the second wave of the pandemic are risks that the central bank faces.

The WPI inflation rise is perhaps a harbinger of price problems ahead. Bond markets seem to have already smelled trouble with the 10-year benchmark yield rising roughly 10 basis points on Thursday.

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