Wholesale inflation is at a 30-year high. Why is govt not worried?

Outside the Eco-Chamber

Hindi films have rarely had songs on inflation. But of the few that have, the 1974 flick Roti, Kapda aur Makaan and the 2010 release Peepli Live stand out.

Roti, Kapda aur Makaan had the superhit song …bhaaki kuch bachcha to mehangai maar gayi (…whatever was left, inflation took it away).

The Peepli Live song went like this, …sakhi saiyan to khub hi kamaat hain, mehangayi daiyan khaaye jaat hai (O, my friend, my husband does earn well, but the inflation witch eats it all).

Inflation, or the rate of price rise, is thus a silent tax, and it takes away the purchasing power that people have. This makes it politically the most sensitive of all economic indicators.

Indeed, the most recent measure of inflation as per the wholesale price index (WPI) should be a worry for the government. In November, it stood at 14.2%. This means that wholesale prices rose by 14.2% in comparison to what they were in November 2020.

This is the highest monthly inflation in the current WPI series, which starts from April 2012 onwards. The spliced WPI series published by the Centre for Monitoring Indian Economy has data going as far back as April 1983. As per this series, the wholesale inflation in November is the highest seen since April 1992, when it was at 13.8%. So, WPI inflation last month was at a nearly three-decade high.

The high prices of different kinds of fuels and minerals have been driving wholesale inflation up. Take the case of iron ore, a basic ingredient in the making of steel. Its price in November went up 56.4%. Overall, mineral prices went up 20.9%. As for fuel, petrol price rose 85.4%, diesel price 86.1% and LPG price 65.2%.

This increase in prices of fuel and minerals has seeped some extent into the increase in the prices of manufactured products, which saw an inflation of 11.9%. Nonetheless, politically, such a high wholesale inflation rate hasn’t set the alarm bells ringing as it should have. Why is that?

In November, inflation, as measured by consumer price inflation (CPI) or retail inflation, stood at 4.9%. This huge gap between wholesale inflation and retail inflation has persisted through most of this financial year. Since April, WPI has been higher than 10% and CPI has been considerably lower. Between April and November, the wholesale inflation was 12.2% whereas retail inflation was 5.2%.

Why are higher wholesale prices not feeding into retail prices? A simple reason for this lies in the fact that food has a much higher weightage in the CPI than in the WPI. Food prices this year have risen at a slower pace than last year. In November, food prices rose at 1.9%. Food prices rising slowly explains the gap between wholesale inflation and retail inflation.

Nonetheless, this comes with a corollary. Base effect is also at work, meaning that food prices rose at a very fast pace throughout last year. Hence, food prices were very high to start with, and on top of that we have had some more price rise.

Between April and November 2020, food inflation was at 9.9%. This year, it stood at 2.8%, thanks to the base effect. Starting next month, this base effect will go away because food inflation in December was 3.4%.

There is another point that needs to be made, taking the case of vegetables. Vegetable prices this November fell by 13.6%, in comparison to that in November 2020. This might lead many to quip that the government data collectors are clearly not visiting the same markets as the common folks are.

But it is base effect at work again. Vegetable prices in November 2020 had risen by 15.5%. Interestingly, if we compare month-on-month prices of vegetables, in October prices went up by 14.2% in comparison to September and they went up 7.5% in comparison to October. This explains the recent spurt in vegetable prices.

There is another reason for higher wholesale prices not feeding into retail prices. Given the destruction in consumer demand that happened due to the pandemic lockdown, companies resisted passing on price increases to their consumers. But with demand picking up, this has started to change. Fast-moving consumer goods companies have started to raise prices or cut product pack sizes. This will start showing up in the retail inflation number soon.

Further, telecom companies have also increased prices by 20-25%, largely for their prepaid plans. Also, as the economy keeps opening up, services inflation will rise further. Take the example of recreation and amusement inflation. The inflation in the last three months is the highest it has ever been in the current CPI series since 2012. This is a clear example of the fact that the well-to-do are stepping out of their homes and this is pushing up prices of everything from hotel rooms to cinema tickets.

Specifically, in a city like Bengaluru, thanks to the presence of IT companies and many unicorns, high wage inflation will also feed into retail inflation, hurting those who aren’t seeing their incomes grow at the same pace as those working in such companies.

Of course, on top of this is the fear of Omicron, the new variant of the Covid virus. If Covid spreads again due to the new variant, there will be demand destruction, but there will be supply chain disruptions as well, which will feed into retail inflation. All in all, we can safely bet that retail inflation will go up in 2022. It will become a political concern, if it hasn’t already become one.

(Vivek Kaul lives to read crime fiction, and unlike his honest ancestors, makes a living writing on economics.)

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