Wholesale Inflation Hits 16-Month High at 3.4% in June

In June, wholesale inflation climbed to a 16-month high of 3.4%, up from 2.6% in the previous month, driven by increased food and manufactured products inflation, according to data released by the government on July 15.

"The jump in the WPI inflation to 3.4% in June 2024 was broad-based, and along expected lines, displaying the third consecutive month of a sizeable sequential step up," stated Aditi Nayar, chief economist at Icra.

Sequentially, wholesale prices rose by 0.4% from May, with the food index increasing by 2.5% and manufactured products by 0.14%. Wholesale food inflation surged to 8.7% compared to 7.4% in the previous month, reaching a 20-month high.

In May, rising food prices contributed to wholesale inflation as manufactured products experienced inflation for the first time since February 2023. Manufactured products, which make up nearly two-thirds of the index's weight, saw inflation rise to 1.43% from 0.8% in May.

"It is really the food inflation that we have seen in the CPI too that is being a major driver, with vegetable prices being up significantly. The other side to it is that we are also seeing manufacturing prices inching up and that will be a strain on corporate margins," commented Sujan Hajra, chief economist at Anand Rathi Shares and Stock Brokers.

In June, six of the 10 major food categories experienced double-digit inflation, with onions and potatoes leading the way. Potato inflation increased to 66.4% in June from 64.1% in the previous month, while onion inflation surged to 93.4% from 58.1% in May. Pulses inflation remained high at 21.6%, and paddy inflation rose to 12.1% from 11.8%.

The significant rise in food inflation contributed to consumer inflation exceeding 5% after four months, according to data released on July 12. Food inflation rose to 9.4% from 8.6%, with vegetable and pulses inflation both in double digits. Retail inflation for potatoes and onions was at 50%.

Despite high inflation and improved industrial production, the central bank is unlikely to change the policy rate. Experts believe the central bank will maintain the policy rate at 6.5% for the ninth consecutive time in its August meeting.

Some analysts have postponed their expectations for a rate cut to December, suggesting that an October rate cut will depend heavily on monsoon progress. Experts also predict that July is likely to see deflation again, as favorable base effects and easing global commodity prices help contain wholesale inflation. Icra forecasts wholesale inflation to dip to -2% in July.

"After rising to seven-month high levels in May 2024, global commodity prices have seen a continuous dip. The Bloomberg commodity price index has eased by 0.9% sequentially... in YoY terms, the index contracted by 3.4% in July 2024 (up to July 12, 2024)... This augurs well for the WPI inflation print in the month (July)," said Nayar.