India's wholesale price inflation has surged to a 15-month high, driven primarily by soaring vegetable and energy prices. Official data released on Friday revealed that the Wholesale Price Index (WPI) rose to 2.61% in May, up from 1.26% in April.
This marks the seventh consecutive month of positive wholesale inflation after a period of negative growth that lasted until October last year.
Factors behind the surge
The spike in inflation was most pronounced in the food sector. The WPI for food jumped from 5.52% in April to 7.40% in May. Key contributors to this increase include cereals, paddy, pulses, vegetables, potatoes, onions, and fruits. Alongside food, other sectors such as crude petroleum, natural gas, mineral oils, and manufactured goods also saw significant price rises.
According to Sanjeev Agrawal, President of the PHD Chamber of Commerce and Industry, food inflation is expected to stabilise by September or October 2024. This forecast is based on the anticipated arrival of kharif crops in the markets and efforts by the government to strengthen supply chains.
Additionally, an above-normal southwest monsoon is expected to further support this stabilisation.
Economic context and historical trends
Wholesale inflation had dipped into negative territory in April of the previous year and again during the early days of the COVID-19 pandemic in July 2020. The WPI had reached a peak of 8.39% in October 2022 and has been on a decline since then.
Notably, the WPI-based inflation rate was in double digits for 18 consecutive months until September 2022.
The Commerce Ministry releases WPI figures monthly, using data from institutional sources and selected manufacturing units across the country. This data is typically published on the 14th of each month or the next working day.
Retail inflation trends
While wholesale inflation is rising, India's retail inflation rate has shown signs of softening. In May, annual retail inflation dropped to a 12-month low of 4.75%, slightly down from 4.83% in April. Despite this moderation, food prices continue to pose challenges for policymakers.
Retail inflation, measured by the Consumer Price Index (CPI), was 5.7% in December last year and has been gradually declining. Although the current retail inflation rate falls within the Reserve Bank of India's (RBI) comfort zone of 2-6%, it remains above the ideal target of 4%.
The persistent pressure on food prices continues to disrupt the disinflation process and challenges the RBI's goal of achieving the 4% target.
Monetary policy response
In response to inflationary pressures, the RBI has raised the repo rate by a total of 250 basis points since May 2022, bringing it to 6.5%. This increase in interest rates is intended to suppress demand and help bring down the inflation rate.
However, ongoing uncertainties in food prices may continue to impact the inflation outlook, complicating the path to achieving the desired inflation trajectory.
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