Wholesale inflation falls below 2% for first time in four months in August

WPI for August

Wholesale inflation dropped below 2 percent for the first time in four months, owing to easing commodity and food prices.

India’s wholesale inflation declined to four month low of 1.31 percent in August compared with 2.04 percent in the previous month, according to data released on September 17.

"A broad-based decline in the inflation rates of major segments such as food, core, energy and fuel & power pushed the WPI inflation to a four-month low in August 2024. In fact, fuel & power witnessed a contraction in prices to the tune of 0.7% in August 2024 for the first time after April 2024," said Paras Jasrai, senior analyst, India Ratings and Research.

The trajectory of wholesale prices has again diverged from consumer inflation, which rose to 3.65 percent from 3.6 percent earlier.

Sticky food inflation, especially in vegetables, pulses, and cereals, and an uptick in service inflation contributed to the faster pace of rise in prices of the consumer basket.

On the other hand, food inflation fell to a ten-month low of 3.3 percent in August compared with 3.6 percent earlier.

"The WPI-food inflation print eased slightly to a 10-month low of 3.3% in August 2024 from 3.6% in July 2024, amid a sharp sequential decline in the primary food articles index," said Aditi Nayar, chief economist, Icra.

Primary food articles inflation was a lower 2.4 percent compared with 3.1 percent in the previous month.

"Extremely high inflation prints of onion and potato does not bode well for the thalinomics as the food prices and hence the thali prices of the population will see upward price pressures," said Ranen Banerjee, leader, Economic Advisory, PwC India.

Manufacturing products, which account for nearly two-thirds of the index, also witnessed an easing of inflationary pressures to 1.22 percent from 1.58 percent in the previous month.

Sequentially, wholesale price index was 0.45 percent lower, as manufacturing prices remained unchanged.

Wholesale inflation is likely to dip further if crude prices remain at current levels. Brent crude prices have been hovering near a three-year low of $70. An earlier analysis by Moneycontrol showed that lower crude oil prices for longer period could upend the government's fiscal math, as it could lead to lower nominal growth than earlier projected.

"Additionally, the price of the Indian basket of crude oil has averaged 6 percent lower in September 2024 on a sequential basis, while touching the lowest levels in 33 months, which would also help contain the uptick in the headline WPI inflation print in the month. Overall, ICRA expects the WPI inflation to rise to ~2.0% in September 2024 from 1.3% in August 2024," Nayar said.

A $10 decrease in crude oil leads to a 50-bps or 0.5 percentage point decline in the wholesale price index, constituting nearly 60 percent of the GDP deflator.

Jasrai also noted that benign commodity prices are likely to keep inflation contained in September, despite base turning unfavourable for food.

"A slower WPI inflation is a precursor to moderation in retail inflation and augurs well from the monetary policy point of view. However, it is also a testimony of weak demand conditions and slower nominal GDP growth, which has implications for the fiscal profile of the economy," Jasrai further noted.