Data released by the government on Tuesday showed wholesale inflation surging well ahead of retail inflation, complicating the assessment of price pressures, and, hence, the interest rate trajectory, in India.
Wholesale price inflation rose sharply to 5.25 percent in January compared to 3.39 percent in December. Retail inflation data, released on Monday, was in contrast to this. According to that data set, consumer price inflation fell to an all-time low of 3.2 percent in January compared to 3.4 percent in December.
The divergence is not surprising as demonetisation has pushed down prices of food items, which have a far greater weight in the retail inflation index. However, the wholesale index, which gives a higher weight to fuel, minerals and manufactured goods, is seeing upside pressure due to the increase in global commodity prices.
Commodity Costs Drive Wholesale Inflation Higher
In January, the fuel and power index rose 4.7 percent in January compared to the previous month. On a year-on-year basis, inflation in the fuel and power category is running at 18.14 percent.
The case with minerals is similar.
Year-on-year inflation in the minerals category has surged to 25.44 percent. The minerals index jumped 1 percent between December and January.
The broader metals and metal products category saw a 2.3 percent increase month-on-month. Annual inflation here was at 7.97 percent.
Higher input prices are starting to feed into manufactured goods inflation which has risen to 3.99 percent. On a month-on-month basis, that index rose 0.5 percent.
Also Read: Retail Inflation At Its Lowest Level
What Does It Mean For Interest Rates?
Under the new monetary policy framework, policy rates are driven by the target for consumer price inflation, which is set at 4 percent (+/- 2 percent). As such, wholesale inflation does not have a direct bearing on monetary policy. The message coming through from wholesale inflation, however, would be an input into the outlook for interest rates.
With core retail inflation rising to above 5 percent, as reflected in the data released on Monday, and inputs costs rising at the wholesale level as well, the central bank may be justified in holding rates steady.
In its most recent review, the monetary policy committee (MPC) kept rates unchanged at 6.25 percent and changed its stance to ‘neutral' from ‘accommodative'. It chose to focus on core inflation pressures while explaining the drop in retail headline inflation as a temporary after-effect of demonetisation. Subsequent data suggesting wholesale inflation is also on the rise may add to the central bank's concerns about inflation.
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