From UPSC perspective, the following things are important :
Prelims level : Inflation
Mains level : Inflation - CPI, WPI divergence
The retail inflation as measured by the Consumer Price Index touched a 16 month high at 4.62%. The wholesale price inflation measured by the Wholesale Price Index is on the verge of entering the negative territory. The gap between the two is currently the widest in two years.
- In October, wholesale price inflation dropped to 0.16%.
- Most analysts expect WPI inflation to decline further in the coming months, weighed by a base effect.
- Wholesale price deflation signals that producers lack pricing power and maybe offering discounts at a time consumer expenditure has dropped to an 18 quarter low in the April-June period.
- Automakers offered heavy discounts during the festive season to break the trend of falling sales.
- Factory output data for September also showed that the production of both consumer durables and consumer non-durables contracted during the month. Overall output shrank to its lowest level at least in seven years.
Reasons for high CPI
- CPI and WPI are two different sets of indicators with varied compositions.
- Manufactured items have the highest weight of 64.23% in WPI, while fuel and primary articles have 13.15% and 22.62% weight, respectively.
- Food and beverages have the highest weight of 54.18% in CPI. Services sectors such as health, education, and amusement have a combined weight of 27.26%.
- So the supply shortage of onions and tomatoes due to floods and unseasonal rains has a disproportionate impact on the overall retail inflation than wholesale price inflation.
- A spike in crude oil prices or a rise in other commodity prices would drive WPI based inflation up faster than the CPI-based inflation.
CPI – Food inflation
- Retail food inflation often mimics wholesale food inflation as the price rises are first reflected in the wholesale market than in the retail market.
- In October, retail food inflation quickened to 7.89% following similar print in wholesale price inflation in September at 7.47%.
It led to…
- The WPI based inflation has lost the primacy that it once enjoyed in economic policy debates when RBI signed the monetary framework pact with the Centre in 2015.
- Now, the RBI is mandated to only achieve the medium-term target for CPI inflation of 4% within a band of two percentage points.