Why inflation and WPI is down, but not (all) prices

Source: The post is based on the article “Why inflation and WPI is down, but not (all) prices” published in The Indian Express on 23^nd June 2023.

Syllabus: GS 3 – Indian Economy – Growth & Development

Relevance: About the trend of inflation

News: The headline retail inflation rate reached a 25-month low in May and the wholesale price index (WPI) also showed a significant decrease.

What has caused the decline in inflation rates?

The high base effect has helped the easing of headline inflation. However, the inflation rate for certain household items still remains high. A high base effect has also helped in a sharp decline in the WPI-linked inflation rate.

According to a data, WPI inflation hit a seven-and-a-half-year low in May, due to the high base effect, lower global commodity prices, low costs of food, fuel, and manufactured items.

However, previously, the wholesale inflation rate had reached double digits during April-September 2022, and reached 16.63% in May 2022.

Moreover, despite the lowering inflation, some items still show a high inflation rate.

Which items have displayed high inflation rates?

Food and Beverages: In this category, ‘cereals and products’ have remained in double digits since September 2022, peaking to 15.27% in March 2023. However, the inflation rate for this category decreased to 12.65% in May.

Milk and Products: This category has seen an inflation rate of more than 7% since September 2022, peaking at 9.65% this February.

Spices: The inflation rates have remained persistent for the spices. Over the last one year, except in May 2022, the inflation rate for spices has remained in double digits, peaking to 21.09% in January this year.

Prepared Meals, Snacks and Sweets: These have also witnessed a persistent rate of inflation. Prepared meals, snacks, sweets too have recorded a 6%-plus inflation rate in the last one year.

Non-food items: Among non-food items, the inflation rate for household goods and services has remained above 6% for the last one year.

Education: It has seen inflation above 5% since July 2022.

Personal care and effects: The inflation rate for this category has been rising steadily.

Which items have displayed a low inflation rate?

Meat and Fish: This category has been in the deflationary zone for the last three months.

Oils and Fats: This category has recorded a sharp decline in inflation, remaining in negative territory for the last four months.

Fruits and Vegetables: These have remained in the negative zone for the last seven months on a year-on-year basis. The inflation rate for vegetables was in double digits during April-September 2022, and entered negative territory thereafter.

What kinds of inflation risks lie ahead?

While the headline inflation number is expected to remain below 5% in the near term, most economists expect the inflation rate to rise marginally in June 2023.

Further, the development of El Nino conditions and their influence on the monsoon could affect crop yields, causing food inflation. 

Although food inflation is expected to remain manageable, it is likely to rise on a year-on-year basis in the second half of FY24, due to seasonal factors. Commodities such as milk, sugar, cereals, etc. may also see a rise in prices.

Note: Weight of different products in CPI – Food and Beverages (54.18%), Cereals and product (12.35%), Milk and products (7.72%), Spices (3.11%), Education (3.46%), Oils and fats (4.21%).

Note: The base effect relates to inflation in the corresponding period of the previous year. If the inflation rate was too high in the corresponding period of the previous year, then even a smaller rise in the Price Index will give a low rate of inflation and vice-versa.

Source: The Indian Express