Soaring wholesale inflation tells us there’s no free lunch

WPI inflation in March was at an eight-and-a-half-year high. A vendor sells vegetables at a retail market in Kolkata
WPI inflation in March was at an eight-and-a-half-year high. A vendor sells vegetables at a retail market in Kolkata

Summary

  • The government’s gain from extra excise duty on petrol and diesel has resulted in higher fuel prices, which has led to inflation

March inflation, as measured by the wholesale price index (WPI), was at 7.39%. The last time WPI inflation was higher than this was in October 2012, when it had stood at 7.4%. Given this, WPI inflation in March was at an eight-and-a-half-year high.

The pace of price rise was driven by an 18% increase in the price of what the WPI index categorizes as mineral oils. This category has a weight of 7.95% in the overall index. It includes cooking gas, petrol, diesel and jet fuel.

The price of petrol and diesel rose by 18.48% and 18.27%, respectively. This is an impact of the rise in the price of oil. The price of the Indian basket of crude oil averaged at $33.36 per barrel in March last year. It averaged $64.73 per barrel in March 2021.

In March 2020, the oil price was crashing primarily because the global economy was taking into account the coming collapse in economic activity due to the spread of the covid pandemic. In April 2020, the price would fall further to $19.90 per barrel.

Over and above this, the total excise duty on petrol and diesel has gone up between March 2020 and March 2021. In March 2020, the excise duty on petrol stood at 19.98 per litre. In March 2021, it stood at 32.98 per litre. When it comes to diesel, the excise duty jumped from 15.83 per litre to 31.83 per litre.

This was done primarily to help the government. The tax revenues were collapsing post covid, and the extra excise duty helped the government shore up its tax revenue.

But as the old cliché goes, there is no free lunch in economics. The government’s gain has resulted in higher fuel prices, which has led to inflation.

Over and above this, the price of manufactured products, which form 64.23% of the WPI index, rose by 7.34% in March from a year earlier. When it comes to the current WPI data index, which has inflation data starting from April 2012, this is the highest inflation that manufactured products have ever seen.

One reason for the increase lies in the increase in the global price of basic metals (iron, copper, lead, zinc etc.), which are used in the manufacturing of different products over the last year. This has happened primarily because global investors have been buying them up, to protect themselves against the massive money printing being carried out by central banks across the world.

Also, governments of many rich countries have announced infrastructure projects to revive their economies, pushing up prices of these metals and their alloys like steel. The category of manufacture of basic metals and its subgroup saw inflation of 16.6% during March. Different kinds of steel, which are a part of this category, saw a price rise varying from 14.51% to 22.76%. Again, at the cost of repetition, there is no free lunch in economics.

Some of the manufactured products which have seen price increases are motor vehicles, furniture, computer and electronic products, rubber and plastic products, etc.

The other reason for the inflation seen in the price of manufactured products lies in the increase in the price of different kinds of fuels.

WPI inflation should go up further in the months to come. Other than the reasons explained above, the base effect should come into play. During the months of April to July 2020, the prices as measured by the WPI index fell. In the month of May 2020, prices fell by 3.37%. This should lead to WPI inflation in May 2021, getting into double digits.

The important question here will the increase in inflation as measured by WPI feed into inflation as measured by the consumer price index (CPI) or retail inflation as it is more popularly known.

Ultimately, companies manufacture products to sell them to consumers. And if the cost of their manufacturing is rising at a never-before-seen rate, they are bound to pass on some of it to the end consumer, thus pushing up retail prices. The retail inflation during March 2021 had stood at 5.52%.

Also, it needs to be mentioned that price hikes for some sectors have been due, given that they did not increase prices in 2020.

Further, with the second wave of covid spreading, supply chains are likely to break down, as they did in 2020, feeding into both wholesale and retail inflation. On the flip side, if the second wave of covid goes on for a while, demand for manufactured products will come down, and that should ease inflation, both wholesale and retail, though that may not be good news for companies.

Vivek Kaul is the author of Bad Money.


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