Wholesale inflation rises to 15-month high in May

India's wholesale inflation surged to a 15-month high of 2.61% in May, driven by rising prices of food and primary articles, according to data released by the commerce ministry on Friday. 

The Wholesale Price Index, a proxy for producers' prices, had risen to 0.53% in March and 1.26% in April. WPI stood at 0.33% and 0.20% in January and February, compared with 0.86% in December, and 0.39% in November.

The May figure outpaced economists' expectation of a 2.5% rise, according to a Reuters poll.

The latest data shows a sharp contrast from a year ago when the WPI stood at -3.61%. The May figure also surpassed economists' expectations of a 2.5% rise, as projected by a Reuters poll.

Inflation drivers

Food inflation was a major contributor, climbing to 9.82% in May from 7.74% in April and 6.88% in March. This increase was primarily due to higher prices of cereals, wheat, pulses, vegetables, and fruits. However, prices of onions, eggs, meat, fish, and milk declined compared to April.

Read This: Why vegetable prices are burning a hole in your wallet

Non-food articles saw a price decline of 3.99% in May, slightly less than the 4.41% decline in April. Fuel and power prices rose by 1.35%, close to the previous month's 1.39% increase. Crude petroleum and natural gas prices accelerated significantly, rising 9.8% from 4.97% in April.

Wholesale inflation had been negative between April and October last year due to falling prices in sectors such as chemicals, electricity, textiles, basic metals, food products, and paper. However, prices have been on the rise since then.

“A gradual hardening in global commodity prices, increased logistics costs due to geopolitical risks, seasonal rises in food prices, and strong industrial activity in India are driving the uptick in wholesale prices," said Suman Chowdhury, chief economist and head of research at Acuité Ratings & Research.

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"The most significant change, however, is in manufacturing inflation which has reversed from a hitherto deflation mode to a figure of 0.8% YoY in May, reflecting stronger demand from the industrial sector. With rising outlook for fuel and power as well as manufacturing inflation in the near term, WPI inflation will continue to see a rising trend in the current year," Chowdhury added.

Manufactured product prices rose by 0.78% in May, compared to a decline of 0.42% in April and a 3.03% decline in the same period last year.

Inflation and RBI policy

Interestingly, retail inflation, based on the consumer price index (CPI), fell to 4.75% in May from 4.83% in April, reaching the lowest level in a year. This moderation was driven by slower price increases for food items such as meat, fish, milk products, vegetables, and spices. 

Consumer price-based Inflation has stayed below 5% since March.

Read Here: Retail inflation eases, factory output ticks higher in May, boosting Indian economy

Earlier in June, the Reserve Bank of India (RBI) kept policy repo rate unchanged at 6.5%, signalling that interest rate cuts may be delayed. The RBI's monetary policy committee maintained its rate pause, seeking durable signs of easing inflation amid volatile food prices. 

Interest rates are a crucial tool in the central bank's arsenal for controlling inflation. Higher interest rates make borrowing more expensive, which can reduce demand and consumer spending by limiting the supply of money in the market.

"Global commodity prices, including those for the Indian basket of crude oil, have also retreated on a month-on-month basis in June 2024 so far. This would help contain the uptick in the YoY WPI inflation print in the month, countering the adverse base," rating agency Icra Ltd said in a statement. "Overall, Icra expects the headline WPI inflation to inch up modestly to about 3.0% in June 2024 (-4.2% in June 2023)," the agency added.