Why wholesale price inflation soared yet again in May and what it means

The Reserve Bank of India (RBI) has been in a firefighting mode, with two back-to-back rate hikes in a month—a 40 basis points (bps) hike in May and a 50 bps hike last week—in a bid to tame inflation.

But prices are on a sprint. Latest numbers released by the commerce ministry on Tuesday show that India's inflation based on the Wholesale Price Index (WPI) hit a fresh high in May, rising to 15.88%.

WPI inflation was 15.08% in April 2022 and 13.11% in May 2021. The latest 10%-plus sprint in May means WPI inflation has extended its stay in double-digit territory to 14 months in a row.

But wasn’t there a slight drop in the consumer price index of inflation?

Yes. The sharp rise in wholesale inflation in May comes a day after the statistics ministry said Consumer Price Index (CPI) inflation dropped to 7.04% last month - albeit thanks to a favourable base effect - from a 95-month high of 7.79% in April.

So, how alarming are India’s wholesale inflation numbers?

At 15.88%, the WPI inflation print for May is the highest in the current series, data for which is available starting April 2013. As such, the latest wholesale inflation number is the highest in at least nine years. Economists had compared data from older WPI series and found inflation in April to be the highest in 30 years. As such, the even-higher May print is the highest in at least three decades.

What drove the country’s wholesale inflation so high in May?

Inflation was driven higher in May by a sequential increase in prices across the board. The overall all-commodities index of the WPI rose 1.4% month-on-month, while the index for primary articles rose 2.8%.

Within primary articles, the index for food articles rose 2.4% from April, with price momentum particularly strong for vegetables (up 18.5% month-on-month).

The index for the fuel and power group was 2.3% higher in May compared to April, while that for manufactured products – which account for 64.23% of the WPI basket – rose 0.6%.

Okay, but is the consumer price index of inflation cooling off now?

Not really. The headline CPI inflation may have moderated to 7% in May 2022, but analysts believe that inflation hasn’t peaked yet and more pain will likely be seen. Headline inflation is likely to breach the 8% mark in the coming months, Nomura said.

Global commodity prices continue to remain elevated while despite passing on the costs to consumers, India Inc is still facing margin pressures. The central government, in a bid to cool the surging inflation, had announced a sharp cut in central excise duty on petrol and diesel, on account of which some moderation was seen in the latest numbers.

But analysts at Nomura said that the rising crude oil prices may negate the impact of the excise duty cut. “We remain alert to second-round effects, through higher inflation expectations, wages and rents, leading to persistence of inflation,” they said in a note on Tuesday.

“We expect CPI inflation to average 7.5% YoY in FY23, with it likely to breach 8% levels in August/September, especially as the favourable base effect starts to fade from July onwards,” Nomura said. The RBI recently upgraded its FY23 inflation forecast to 6.7%.

CPI data released on June 13 meant retail inflation has now been above the RBI's medium-term target of 4% for 32 consecutive months. More worryingly, it has now spent five months above the upper bound of the 2-6% tolerance range. Given the central bank's latest forecast, the Monetary Policy Committee will likely fail in meeting its inflation mandate in October, when CPI data for September will be released.