Inflation based on the wholesale price index (WPI) fell to a two-year low of 3.85 per cent in February on the easing of the prices of manufactured items, fuel and power even though food items remained expensive. WPI inflation has fallen for the ninth straight month: it was 4.73 per cent in January and 13.43 per cent in February, last year.
The fall in WPI comes a day after retail inflation, while declining marginally, remained above the central bank’s upper tolerance limit of 6 per cent for the second consecutive month, leading analysts to predict another rate hike of 25 basis points by the monetary policy committee (MPC) of the RBI in its April meeting. The divergence in WPI inflation and retail inflation can be attributed to differences in the weights of their components.
In the wholesale price index, food has 25-per cent weight, while in the consumer price index (CPI) — the basis for retail inflation — food has 46 per cent weight. Rising food prices, thus, will have a greater impact on retail inflation. Madan Sabnavis, the chief economist at Bank of Baroda, said the MPC members often do point out the contrast in WPI inflation when taking a view that the CPI may be overstating the inflation rate. “Interestingly, core inflation which represents nonfood and non-fuel inflation has been coming down to 2.1 per cent in February going to WPI. In the case of CPI it has remained sticky at 6.1 per cent,” he said.
The divergence between retail and wholesale price inflation has now increased to 259 basis points (bps) in February from a meagre 24 bps in November. Rajani Sinha, the chief economist at CARE Ratings, said that there could be two factors responsible for the divergence. “First, WPI inflation has the support from a favourable base, and second, the manufacturing segment — which contributes more than 60 per cent to the wholesale basket — continued to witness moderation in inflation. Additionally, food categories which were the main culprits for the spike in retail inflation in January, have lower weight in the WPI basket,” she said.
