India’s retail and wholesale inflation stood at 6.5% and 4.7%, respectively, in January. While retail inflation, as measured by the Consumer Price Index (CPI), increased from 5.7% in December, the Wholesale Price Index (WPI) fell for the eighth consecutive month. Both the numbers have surprised analysts. A Bloomberg poll of economists estimated CPI and WPI to be 6% and 4.5%, respectively. What is the larger inflation picture in the economy? Here are four charts that explain this in detail.
Will the divergence in CPI and WPI continue?
CPI and WPI, by design, are meant to capture price trajectories of different commodity baskets. While CPI tracks prices of an average household’s consumption basket, WPI tracks producer prices. This basic difference means that the two inflation indices need not always move in the same direction. While WPI has been falling since June 2022, CPI only started falling consistently from October, a trend that’s now broken. The rise in CPI means the two indices moved in opposite directions in January. If this trend continues, it is bound to add to the dilemma facing policymakers.
See Chart 1: CPI and WPI
Inflation would have been much higher if not for vegetables
Because vegetable prices are more volatile due to seasonal fluctuations, they are always an erratic influence on inflation numbers. This time around, vegetable prices had a moderating influence on inflation. Vegetable prices contracted for three consecutive months beginning November, with the January contraction being 11.7%. If we were to take it out from the CPI basket, both overall CPI and food CPI show a much higher inflation. Analysts expect that the inflation gains out of falling vegetable prices might have already materialised. “The cumulative winter drop in vegetable prices has already reached 25%, one of the largest in recent times. This has created some doubts on whether there are any legs left in this decline in vegetable prices,” Samiran Chakraborty, chief economist, India, Citi Research, said in a note.
See Chart 2: CPI and CPI-ex vegetable
In fact, food inflation minus vegetables is close to double digits
Thanks to a sharp increase in prices of cereals, milk and meat and eggs, food inflation increased sharply from 4.2% to 6% between December and January. The food inflation picture looks much more alarming if we were to take out vegetables, which have a share of 15% in the food basket, from the equation. Food inflation excluding vegetables stood at 9.4% in January. This number was just 5.9% in July 2022 and 7.5% in November. The January number for food inflation, excluding vegetables, is the highest since June 2022. While oil seeds drove the previous episode of high food inflation through a prolonged spell of double-digit inflation, cereals are driving the latest rally, where unlike oilseeds, there is no import dependence. If cereal inflation does not come down soon — this will largely depend on climatic factors — food price pressures can begin to hurt the economy and potentially trigger a wage-price spiral among the blue-collared workforce.
See Chart 3: food inflation chart
Core inflation, meanwhile, remains high and unchanged
At 6.2%, core CPI inflation, which leaves out the more volatile food and fuel components, was unchanged in December and January. Rounded to one decimal place, core inflation has been above 6% for 21 consecutive months, which is the upper tolerance limit of the Reserve Bank of India. The only time core inflation has been higher than 6% for a longer period was between January 2012 and August 2014. To be sure, both overall and core inflation was much higher back then than it is now. A higher core inflation value underlines the broad-based nature of price pressures in the economy, and is likely to encourage a hawkish monetary policy stance. “Headline inflation excluding vegetables has been rising well above the upper tolerance band and may remain elevated, especially with high core inflation pressures. Inflation, therefore, remains a major risk to the (economic) outlook,” the monetary policy committee of the central bank said in its latest resolution.
See Chart 4: core-inflation
