High inflation on CPI and WPI
The latest inflation readings based on the Wholesale Price Index and the Consumer Price Index are a cause for concern. While the annual gain in wholesale prices hit a 23-month high of 3.55 per cent in July, retail inflation quickened past the Centre’s new Monetary Policy Framework’s upper limit for tolerance(6%) to 6.07 per cent.
Reason for high food inflation
Food costs — a key component in both indices — were the main culprit. Inflation in the food category of the CPI accelerated to 8 per cent, and in the case of the WPI surged to a 31-month high of 11.8 per cent.
Prediction for future
Some economists and the Reserve Bank of India have pointed to the forecast of normal rainfall this year, and the improvement in sowing on the back of the steady progress of the monsoon, as clear indicators that the outlook for supply can only improve going forward.
Possible risks on food inflation front
For one, any beneficial monsoon impact on the predominantly agrarian rural economy is bound to result in an uptick in rural wages, and by extension demand-side consumption pressures. According to a January 2016 International Monetary Fund working paper on ‘Understanding India’s Food Inflation: the Role of Demand and Supply Factors’, rising real rural incomes have had the largest impact on food inflation.
This is particularly so as the large weight on food in household expenditure has meant that robust real income growth has tended to translate into substantial demand-side pressures that far outpace the supply-side gains. This stickiness of food costs can undermine the steady gains in the fight against price gains, a battle that must be fought since inflation ultimately ends up being a tax on the poor.