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Wholesale Price Index Inflation hits 22 month low in May

Wholesale Price Index Inflation hits 22 month low in May

Tag: GS 3 || Economy || Banking & Financial Sector || Inflation

Why in news?

  • Producers’ inflation, as indicated by the wholesale price index (WPI), slipped to 22-month low at 2.45 per cent in May 2019.

Implications

  • Low demand: Lower rate of inflation for producers indicates low demand.
  • If it continues for some more time, it will affect –
    • capacity utilisation and
    • finally profitability of the corporate sector as well as
    • new investments.
  • All these make a case for tax rationalisation, both for individual and corporates, so that consumption and investment demands get a push.

Retail inflation

  • Interestingly, the WPI slipped at a time when retail inflation surged to seven-month high in May as indicated by the Consumer Price Index (CPI) at 3.05 per cent (2.99 per cent in April). This is the highest after October, 2018.

Food inflation

  • Major driver in CPI: Food inflation was the major driver of retail inflation in May 2019.
  • Food is affecting the WPI too.
    • Despite lower wholesale inflation, stress is emerging on the food articles category. Here inflation is in high single-digit.
    • Besides, some cereals such as jowar, bajra, maize and pulses have witnessed double digit inflation now for the fourth consecutive month.
  • This, against the backdrop of delayed and less-than-normal monsoon, could aggravate food inflation further in the coming months lest the government monitors the situation proactively, checks speculative activities and intervenes in the market to stabilise prices.

WPI major drivers

  • Manufactured products: For the overall lower WPI, the key driver has been manufactured products where inflation declined to 1.28 per cent in May compared with 1.72 per cent in April.
  • Fuel group inflation: Even fuel group inflation dropped to one per cent in May compared with 3.8 per cent in April due to softening of global crude oil prices.
  • Core inflation: Further, core inflation at 1.2 per cent was at 29-month low in May.
  • Weakening demand: This is clearly an indication of the weakening of demand impulse in the economy.
  • Dwindling auto and FMCG sales growth have been pointing towards this for the past several months.

RBI policy

  • RBI may continue to pursue a policy that would be supportive of growth.
  • The RBI has cut policy rates in last three monetary policy reviews.
  • Although impact of monetary policy is felt with a lag, India Ratings believes there is still a scope of one more rate cut this fiscal.
  • However, besides being dependent on data it will also take into consideration fiscal policy stance of the government.

Mains question

  • Examine the causes driving the decline in WPI. What does declining WPI signify?