High fuel prices push wholesale inflation to record high3 min read . Updated: 17 May 2021, 07:53 PM IST
- This is the first time that wholesale inflation has entered double digits
Wholesale inflation was at 10.5% in April 2021, the highest it has ever been in the current series, which starts from April 2011.
The following chart plots monthly inflation over the last nine years, starting from April 2012.
This is the first time that wholesale inflation has entered double digits. The highest level before April was between January and March 2013, when the inflation ranged between 8-8.6%.
So why has there been such a massive jump in wholesale inflation? The price of cooking gas, petrol and diesel has gone up by 20.3%, 42.4% and 33.8%, respectively, from a year earlier.
There are two reasons for this price rise. First, the price of the Indian basket of crude oil averaged at $19.9 per barrel in April 2020. It averaged at $63.40 per barrel in April 2021, a jump of 219%.
In April last year, as the covid pandemic spread worldwide and countries resorted to lockdowns, the demand for oil collapsed. This year developed countries have been able to control the pandemic, and global economic activity has picked up, leading to an increase in the price of oil.
Second, the total central government excise duty on petrol and diesel has shot up. In April 2020, the total excise duty on petrol had stood at ₹22.98 per litre. In April 2021, it stood at ₹32.9 per litre. When it comes to diesel, the central excise duty jumped from ₹18.83 per litre to ₹31.8 per litre.
This government increased the excise duty on fuel as collections of other taxes fell because of the pandemic.
Due to this, the price of diesel and petrol has risen sharply in the past year. The rise in the price of petrol, diesel and cooking gas has added 1.9 percentage points to wholesale inflation.
From May onwards, the inflation because of petrol and diesel will cool, unless oil prices go up further. The reason for this lies in the fact that the excise duty on petrol and diesel were increased from 6 May 2020 onwards. The excise duty on petrol and diesel was increased to ₹32.98 per litre and ₹31.83, respectively.
From 2 February 2021, excise duty on petrol and diesel stood at ₹32.90 per litre and ₹31.80, respectively. Hence, between last May and this May, there will be a very little inflationary impact because of excise duty, as has been the case up until April.
This should also help in bringing down wholesale inflation.
Other than fuel prices, the prices of manufactured products, which form around 64% of the index, rose 9% over the last year. Within manufactured products, the highest price rise was that of vegetable oil, which rose 43.3%. This is something that has impacted consumers directly.
Other than this, the price of basic metals (copper, tin, zinc etc.) went up by 19.3%. The price of steel rose by 16.7%. One sector where this price rise is clearly visible is automobiles, with prices going up since the start of the current financial year.
The rise in commodity prices is primarily because the global economy is expected to continue to be on a recovery path in 2021-22. Large parts of the rich world are getting vaccinated fast, and this is expected to drive up economic activity.
This leaves us with the question of whether wholesale inflation will feed into inflation as measured by the consumer price index (CPI) or retail inflation.
Retail inflation in April came in at 4.3%, a three-month low. This was primarily on account of low food inflation of 2%. The base effect was at work, with food inflation in April 2020 having been at 11.7%.
The core CPI (which leaves out food, fuel, and light items) continued to remain high at 5.5%. It has been higher than 5.4% since July last year. This basically tells us that at some level, high inflation as measured by WPI is feeding into retail inflation as well.
Food inflation should go up in the months to come. This, along with wholesale inflation, will push up retail inflation as well.
Never miss a story! Stay connected and informed with Mint. Download our App Now!!