Wholesale price inflation is at its highest for 30 years. Why is the government not worried?
Hindi movies have rarely had songs about inflation. But among the few who did, the 1974 film Roti, Kapda aur Makaan and the 2010 version Peepli Live come out.
Roti, Kapda aur Makaan had the super hit song … Bhaaki kuch bachcha in mehangai maar gayi (… What was left, inflation won).
the Peepli Live the song was like that, … Sakhi saiyan to khub hi kamaat hain, mehangayi daiyan khaaye jaat hai (Oh, my friend, my husband wins well, but the inflation witch eats everything).
Inflation, or the rate of price increase, is therefore 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 according to the Wholesale Price Index (WPI) should worry the government. In November, it stood at 14.2%. This means wholesale prices are up 14.2% from where they were in November 2020.
This is the highest monthly inflation of the current WPI series, which starts from April 2012. The spliced WPI series published by the Center for Monitoring Indian Economy contains data going back to April 1983. According to this series , wholesale inflation in November is the highest since April 1992, when it was 13.8%. Thus, WPI inflation last month was at a nearly three-decade high.
High prices for different types of fuels and minerals have pushed up wholesale inflation. Take the case of iron ore, a basic ingredient in the manufacture of steel. Its price in November rose 56.4%. Overall, mineral prices rose 20.9%. As for fuel, the price of gasoline increased by 85.4%, the price of diesel by 86.1% and the price of LPG by 65.2%.
This increase in the prices of fuels and minerals was partially insinuated in the increase in the prices of manufactured products, which experienced an inflation of 11.9%. Nonetheless, politically, such a high wholesale inflation rate has not sounded the alarm bells as it should have. Why is that?
In November, inflation, measured by consumer price inflation (CPI) or retail price inflation, stood at 4.9%. This huge gap between wholesale and retail inflation persisted for most of this fiscal year. Since April, the WPI has been above 10% and the CPI has been considerably lower. Between April and November, wholesale inflation was 12.2% while retail inflation was 5.2%.
Why are higher wholesale prices not reflected in retail prices? A simple reason for this is that food has a much higher weight in the CPI than in the WPI. Food prices have increased this year at a slower pace than last year. In November, food prices rose 1.9%. The slow increase in food prices explains the gap between wholesale and retail inflation.
Nonetheless, it comes with a corollary. The base effect is also at work, which means that food prices have increased at a very rapid rate throughout the last year. As a result, the food prices were very high initially, and on top of that we have experienced an increase in prices.
Between April and November 2020, food inflation was 9.9%. This year it stands at 2.8%, thanks to the base effect. From next month, this base effect will disappear because food inflation in December was 3.4%.
There is another point that must be made, taking the case of vegetables. Vegetable prices in November fell 13.6%, compared to November 2020. That could lead a lot to say that government data collectors clearly don’t visit the same markets as ordinary people.
But this is again the basic effect at work. Vegetable prices in November 2020 had increased by 15.5%. Interestingly, if we compare the prices of vegetables month to month, in October the prices were up 14.2% from September and they were up 7.5% from October. . This explains the recent surge in vegetable prices.
There is another reason why higher wholesale prices do not flow through to retail prices. With the destruction of consumer demand due to the pandemic lockdown, companies have resisted passing price increases on to their consumers. But as demand picked up, that started to change. Fast-moving consumer goods companies have started to raise prices or reduce the size of product packaging. This will soon start to show up in the retail inflation number.
In addition, telecommunications companies have also increased prices by 20 to 25%, mainly for their prepaid plans. In addition, as the economy continues to open, service inflation will rise further. Take, for example, the inflation of leisure and entertainment. Inflation over the past three months is the highest it has ever been in the current CPI series since 2012. This is a clear example of how the better-off are leaving their homes and it is. jack up the prices of everything from hotel rooms to movie tickets.
Specifically, in a city like Bangalore, thanks to the presence of IT companies and numerous unicorns, high wage inflation will also fuel retail sales inflation, hurting those who do not see their incomes grow at the same rate. than those who work in these companies.
Of course, there is also the fear of Omicron, the new variant of the Covid virus. If Covid spreads again due to the new variant, there will be destruction of demand, but there will also be supply chain disruptions, which will fuel retail sales inflation. All in all, we can bet that retail price inflation will increase in 2022. This will become a political concern, if it is not already the case.
(Vivek Kaul lives to read detective novels and, unlike his honest ancestors, makes a living writing about economics.)
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