Wholesale inflation falls further to -4.12% in June, lowest since October 2015

WPI inflation has been in negative territory for three months in a row now.

India's wholesale prices remained in the deflationary zone for the third month in a row in June, data released on July 14 by the commerce ministry showed, with Wholesale Price Index (WPI) inflation falling further to -4.12 percent from -3.48 percent in May.

At -4.12 percent, the latest WPI inflation print is the lowest since October 2015, when it had come in at -4.76 percent.

Even as wholesale prices fell deeper into the deflationary zone, data released by the statistics ministry on July 12 showed headline retail inflation rose more than expected to 4.81 percent in June, breaking a four-month falling streak.

The divergence between WPI and CPI inflation is due to the differences in the two basket of items, with the latter containing services and a higher share of food items.

While Consumer Price Index (CPI) inflation rose last month due to the fading of a favourable base effect that had helped drag it down to a 25-month low of 4.25 percent in May, retail prices also rose on a month-on-month basis, with the general index of the CPI rising 1 percent in June from May.

However, the all-commodities index of the WPI fell by 0.4 percent month-on-month in June, indicating weakening of price momentum. The sequential fall in prices was led by fuel and manufactured products, whose indices contracted by 1.8 percent and 0.5 percent, respectively.

Among manufactured products, which account for nearly two-thirds of the entire WPI, the biggest faller was edible oils, whose index was down 3.1 percent.

"Falling international commodity prices across crude oil, metals, fertilisers, and cotton are contributing to deflation in manufacture of basic metals, textiles, chemicals, among others. This reduction in input costs is also reflected in inflation in manufacturing of machinery, electrical equipment and motor vehicles to ease further in June," said Rahul Bajoria, head of EM Asia (ex-China) Economics Research at Barclays.

Within fuel items, the index for LPG was down 2.7 percent on a sequential basis.

Meanwhile, food prices were on the up - as was the case in the CPI data - with the food index 1.4 percent higher in June compared to May.

Among food items, the charge was led by vegetables, whose index was 13.2 percent higher in June from May. Within vegetables, the eye-watering increase in tomato prices was the primary driver.

The index for tomato was up a massive 56 percent month-on-month in June. Tomato prices have increased further in July.

While the continued drop in wholesale inflation will be welcomed by policymakers, the biggest concern will be key food items such as vegetables, especially tomatoes, which are threatening to heavily influence the overall inflation trajectory. The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) had warned in June that, going forward, the headline inflation trajectory is "likely to be shaped by food price dynamics".

As per the retail inflation data released on July 12, the Consumer Food Price index of the CPI rose 2.5 percent month-on-month in June, with the vegetable index jumping 12.2 percent from May.

Other food items that are a concern include pulses, wheat, and certain spices.

"The sharp sequential uptick in food prices due to vegetables, milk, pulses, and cereals is concerning," noted Rajani Sinha, chief economist at CareEdge.

"Nonetheless, given the higher weightage of energy and manufactured products in the WPI basket, we expect WPI inflation to remain in contractionary zone in the first half of 2023-24. Contraction in WPI index is likely to have a moderating impact on CPI inflation with a lag," Sinha added.