March WPI inflation at 8-yr high; economists see it in double digits in May

Crude petroleum inflation rose to 73.7 per cent in March from 7.18 per cent in February
Wholesale price index-based inflation, led by soaring prices of fuels and those of manufactured products, touched its highest point in more than eight years in March.


The rate rose to 7.4 per cent in the month against 4.17 per in February and 2.51 per cent in January, the data released by the Ministry of Commerce and Industry showed on Thursday.


The rate of price rise is expected to be in double digits in the near term, led by food and a low base of last year, economists cautioned.


This dims hopes for any policy rate reduction in the near term even as there is economic uncertainty amid the second wave of the pandemic in the country.


Its retail price counterpart — the consumer price index — released on Tuesday also saw inflation surge to a four-month high of 5.03 per cent in March, on the back of a sharp rise in food and core segment.


WPI inflation has printed much higher than our expectations of 6.1 per cent, with faster than anticipated upticks in inflation for core items and fuels. We expect the headline and core WPI inflation to rise further over the next two months, peaking at around 11.0-11.5 per cent and 8-8.5 per cent, respectively, in May 2021,” said Aditi Nayar, principal economist, ICRA Ratings.


“The expected trajectory of WPI inflation, and its partial transmission into CPI inflation, supports our view that there is negligible space for rate cuts to support growth, in spite of the growing uncertainty related to the surge in Covid-19 cases, localised restrictions and emerging concerns regarding migrants returning to the hinterland,” added Nayar.


Core WPI inflation also touched a series-high of 7 per cent in March, led by a steep increase in prices of metals, rubber, textiles, chemicals, etc.


“… (T)he global prices of many of these have recorded large increases in recent months on the back of the optimism generated by the Covid-19 vaccines’ roll-out,” said Nayar.


Annual inflation in FY21 stood at 1.2 per cent against 1.7 per cent in FY20, the lowest in the last five years.


Manufactured products, which account for 64.23 per cent of the index, saw the inflation rate rise to a series high of 7.3 per cent in March from 5.81 per cent in February.


Fuel and power, which has a weighting of 13.2 per cent in the WPI, saw inflation touch a 28-month high of 10.25 per cent, against 0.58 per cent in February and a contraction of 4.78 per cent in January.


The rate of price rise in petrol shot up to 18.48 per cent in March against 0.83 per cent in the previous month and a contraction of 7.31 per cent in January. WPI inflation in diesel was up at 18.27 per cent from a contraction of (-) 0.11 per cent in February and (-) 10.31 per cent in the previous month.


The crude petroleum inflation rate rose to 73.7 per cent in March from 7.18 per cent in February.


Rahul Bajoria, chief India economist, Barclays India, said sharp month-on-month price gains continuing in the fuel and manufacturing segments could become a cause for concern.


“We expect WPI inflation to continue to rise for a few more months, possibly reaching double digits the first time since September 2011 in May 2021,” he said.


The food index in March 2021 rose to a five-month high of 5.28 per cent in March against 3.31 per cent in the previous month and a contraction of 0.26 per cent in January.


Inflation in pulses surged to 13.15 per cent in March against 10.25 per cent in February and that for fruit shot up significantly to 16.33 per cent during the month versus 9.48 per cent in February.


“The near-term inflation outlook is not so rosy. With summer setting in, perishable products (especially vegetables) are likely to experience higher inflation, and the low base of last year will also have an adverse impact of wholesale inflation at least till August,” said Devendra Kumar Pant, chief economist, India Ratings & Research.


Economists ruled out scope for policy rate reduction to boost the economy. “Higher wholesale inflation transmits to retail inflation with a lag, and this makes the job of monetary authorities difficult. The economy at the present juncture needs both fiscal and monetary support (both low rates and ample liquidity). While Ind-Ra expects the policy rates to remain low at the same level and ample liquidity in most of FY22, a spurt in wholesale prices may force monetary authorities to withdraw some of the extraordinary liquidity measures around end of FY22,” said Pant.


The Monetary Policy Committee (MPC) last week left the repo unchanged at 4 per cent. The Centre has kept the inflation target of the monetary policy framework unchanged at 2-6 per cent for the next five years, until 2025-26.


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