WPI inflation hits 23-month high of 3.55%, food items costlier

New Delhi: Driven by costlier food items, WPI-based inflation soared to 23-month high of 3.55 percent in July, prompting demands for strong government action to address supply issues.

The Wholesale Price Index based inflation in June stood at 1.62 percent. It was (-)4.00 percent in July last year.

The earlier high in WPI inflation was recorded at 3.74 percent in August 2014.

Industry has expressed apprehensions that rising WPI inflation may spill over to the retail level, based on the Consumer Price Index, and make it difficult for RBI and the government to contain CPI-inflation at the upper target level of 6 percent.

The Commerce Ministry data showed that inflation in the overall food basket breached the double digit mark at 11.82 percent in July. All items, barring onion, in the basket showed a rising price pressure.

WPI inflation in potato shot up 58.78 percent, pulses (35.76 pc), vegetables (28.05 pc) and cereals (7.03 pc).

Among others, the rate of inflation in sugar was at 32.33 percent and that for fruits rose by 17.30 percent during the month.

WPI inflation, which was in the negative zone from November 2014 to March 2016, turned positive since April.

The spike in WPI follows that of retail or CPI inflation, which too hit a 23-month high of 6.07 percent -- well above the RBI's comfortable level.

Industry chamber Assocham said increase in WPI may result in CPI rising as well, impacting households and retail consumers badly. It suggested that policy makers take steps to minimise the transition of price rise.

"Since CPI is at above threshold level of 5 percent, the economy now is in need of strong actions from Government to address the structural issues of demand and supply within the industry," it said.

Kotak Institutional Equities said inflation trajectory would ease in the second half of the current fiscal with early indicators suggesting correction in food prices.

"We continue to see room for further 0.25 percent rate cut in calendar year 2016," it said in a report.

The WPI inflation for May has been revised upwards at 1.24 percent, against provisional estimate of 0.79 percent.

The July inflation print for manufactured articles read at 1.83 percent, with the rate of price rise in edible oil at 4.18 percent and cotton at 1.52 percent.

However, deflationary trend continued in some items like onion at (-)36.29 percent and petrol at (-)10.30 percent.

ICRA said the gap between the wholesale and retail inflation would narrow in the second half of current fiscal.

"Emerging trends regarding the ongoing kharif sowing suggest an imminent cooling of food inflation in the coming months. In contrast, we expect core WPI inflation to continue to rise," ICRA Senior Economist Aditi Nayar said.

In its monetary policy last week, the Reserve Bank had maintained status quo on key rates citing upside risks to 5 percent inflation target for March 2017.

A six-member Monetary Policy Committee (MPC) will decide on interest rates in the next review meeting on October 4.

Moving towards the new regime, the government last month notified 4 percent inflation target for the next five years, based on which the MPC would take its monetary policy decisions going forward.

The move, which provides for a margin of plus or minus 2 percent in this target thus fixing the upper tolerance level at 6 percent till 2021, is being seen as government putting the seal on outgoing RBI Governor Raghuram Rajan's inflation- first model of monetary policy.

The MPC will set interest rates by majority, with a casting vote for the central bank governor in the event of a tie.

Out of six members of MPC, three will be from RBI -- the Governor, who will be the ex-officio Chairperson, a deputy governor and an executive director.

The other three members will be appointed by the central government, on the recommendations of a search-cum-selection committee, which will be headed by the Cabinet Secretary.