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High WPI inflation works against further rate cuts

Inflation at the wholesale level, measured by the Wholesale Price Index (WPI), increased to 5.3 per cent in January 2017, reaching the highest level since August 2014.

twitter-logoNiti Kiran | May 9, 2017 | Updated 09:11 IST
High WPI inflation works against further rate cuts

Inflation at the wholesale level, measured by the Wholesale Price Index (WPI), increased to 5.3 per cent in January 2017, reaching the highest level since August 2014.

Headline inflation has witnessed a rise for the second consecutive month weighted by higher commodity prices and adverse base effect.  All the three major groups -- primary articles, fuel and power and manufactured products -- recorded an increase in inflation.

Y-o-Y % change

Fuel & power group registered a rise in prices for the sixth straight month, on a y-o-y basis. Fuel prices rose significantly over 9 percentage points between December and January. Inflation in fuel & power group grew at a faster pace since October 2008. The rise was seen across petrol and high speed diesel products.

Manufactured products inflation saw broad-based acceleration to 3.99 per cent owing to higher prices of food products, sugar and core inflation. Under manufactured products, almost all categories recorded inflation in January, with some significant increases in case of food products (10.5 per cent), beverages, tobacco & tobacco products (7.7 per cent) and basic metals, alloys & metal products (7.97 per cent).

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"Overall, the core inflation increased by 0.5 per cent month-on-month, the highest pace witnessed in nine-months," says Suvodeep Rakshit, senior economist, Kotak Institutional Equities.
Primary articles inflation increased to 1.3 per cent in January 2017 from 0.3 per cent in December 2016. Inflation in food articles recorded a deflation of 0.6 per cent in January from a deflation of 0.7 per cent a month earlier. On the other hand, inflation in non-food articles rose to two per cent in January 2017 from 0.6 per cent in the preceding month.

Going ahead, "the divergence between the WPI and CPI inflation is likely to further widen in the first half of this year7 owing to higher commodity prices and adverse base effect, before settling in a narrow range in 2HCY17", adds Rakshit. He expects WPI inflation to average 5.5 per cent in Q4FY17 and 3.6 per cent in FY2017.

The RBI has already refused to pare rates despite benign headline CPI inflation. The upturn in WPI inflation further limits the scope for further monetary accommodation.

 

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