According to the official data released by the Ministry of Commerce and Industry, the annual rate of inflation based on all India Wholesale Price Index (WPI) is provisionally estimated to be 4.73 per cent in the month of January 2023 as compared to February 2022 (year on year basis). It was lower than 4.95 per cent for the month of December 2022 and 6.12 per cent for the month of November 2022 (year on year basis).
However, what comes as a conundrum is the behavior of the retail inflation indices as reflected by the Consumer Price Index (CPI) for the corresponding period. The Consumer Price Index for General category rose by 6.52 per cent (combined for rural and urban consumers) in the month of January 2023 (y o y basis) as compared to 5.72 per cent in the month of December 2022 (y o y basis) and 5.88 per cent in the month of November 2022 (y o y basis). Thus, it is observed that while there is a consistent trend of decline in the wholesale price indices, there is a pattern of increase in the retail price indices in the month of January 2023.
This is explained in the Chart below:
Note: WPI and CPI are observed to be moving in opposite directions in the month of January 2023
Difference in rural and urban retail inflation data:
The retail inflation has increased both in the rural and urban areas in the month of January 2023 as against the previous month (on year-to-year basis) yet it is observed that the prices in rural areas have been on the higher side than the tolerable upper band of the RBI i.e., at more than 6 per cent while in the urban areas it has been just around the upper band in the preceding two months.
This is explained in the Chart below:
Note: Inflation is higher for rural consumers
Further, in the month of January it is observed that the retail inflation in rural areas was much higher than the urban areas and actually put more pressure on the combined price indices as they crossed the upper threshold limit of 6 per cent. Besides, the inflationary pressures have built up in rural areas quite strikingly due to rise in consumer food prices indices at a time when they actually were at a much low level in the urban areas.
This is explained in the Chart below:
Note: Higher inflation in rural areas is putting more pressure on the combined CPI
A more detailed data explains that the weightage given to food items in the rural consumption basket for computing the CPI is 54.18 per cent against 36.29 per cent in the urban consumption basket. Also, housing is not compiled at all in the computation of the CPI (Rural). This is explained in the chart below:
Note: More weightage in CPI is given to the Food items in the rural areas compared to urban areas
The Composition of WPI is different
In the computation of the WPI, the highest weight is given to manufacturing items followed by Primary Articles and Fuel and Power. The respective weights of the articles included in the computation of the wholesale price index are given as under:
Note: Manufacturing Activity commands highest weight in the composition of WPI
Manufacturing activities have shown a consistent trend of reduction in inflation in last three months (y o y basis) and they played a major role in pulling down the average WPI rate during this time even as the Fuel and Power prices have also been dropping from higher levels.
The wholesale food inflation index comprising of ‘food articles’ from the Primary Articles group and ‘food products’ from the Manufactured Products group accounts for 24.38 per cent share in the composition of the WPI. It was also lower though it slightly increased from 2.52 per cent (y o y basis) in December 2022 to 2.95 per cent in the month of January 2023 (y o y basis). However, it increased by 0.65 per cent over the previous month, i.e., December 2022.
Policy Implications of Inflation in India
It is observed that there is difference in the way the WPI and CPI are computed and so it is difficult to find direct linkages between their respective movements. Yet it is being considered as bit weird that while the wholesale price index is slowing down, the retail inflation is surging high.
In particular, some economists have observed that the January retail inflation may have been overestimated by 23 bps and so it may actually be revised from 6.52 per cent to 6.30 per cent. But the indices are clearly reported as provisional data as for the month of January and so we may have to wait till the final figure is reported next month.
Whatever, the reasons, one thing is clear that the RBI seems to be justified to have gone for policy rate increase in the month of February monetary policy statement by 25 basis points and it is likely that if the retail inflation is not back into the tolerable limit of plus minus 4 per cent, i.e below 6 per cent by a comfortable amount, we may as well expect another consecutive increase in the policy rates.
Meanwhile the US inflation is reported to be higher by 0.5% in January 2023 compared to December 2022 and by 6.4 per cent compared to previous year. Although there is increase in inflation rate even as the Fed has almost consistently been pursuing an aggressive monetary policy stance to tackle the inflationary pressures, yet the data showed that it was the smallest annual rise consumer prices. Yet there are apprehensions that the Fed may be compelled to hike the interest rates and may even keep them at elevated levels. And this may further put pressures on the RBI, back home, to also keep policy rates at current level or even consider another raise.
Monsoons may not be as good this year
There are apprehensions raised by most global models that the Pacific Ocean, which holds about 97 per cent of the total water on the planet accounting for 78 per cent of global ocean precipitation and 86 per cent of global evaporation, is quite likely to shift into an El Nino mode from this summer (2023) coinciding with South west Monsoon in India. El Nino effect if it materializes, may adversely affect the kharif crops adversely as we may have less than average rainfalls in certain regions in India. However, at this stage these are mere apprehensions as a more accurate forecast may be made after the month of April as clearer indications are received during that time only.
The state of the economy report of the RBI has also observed that the monetary policy instance may have to remain disinflationary which is a clear indication that the RBI is not going to let go its top priority of keeping prices under control in the next policy statement also.
Reference: This article is published by the Author in the Newsletter “KnowFunda Digest” (9th Edition) on LinkedIn on March 1, 2023.