WPI inflation spikes to record 15.88% in May as heatwave stokes food prices

Wholesale price-based inflation surged to a record high of 15.88 per cent in May as crude prices rose and heatwave brought about a spike in prices of vegetables and fruits, strengthening the possibility of a further interest rate hike by the Reserve Bank.

The Wholesale Price Index (WPI)-based inflation maintained its increasing trajectory for the third month in a row, and remained in double digits for the 14th consecutive month since April last year.

"The high rate of inflation in May 2022 is primarily due to rise in prices of mineral oils, crude petroleum and natural gas, food articles, basic metals, non-food articles, chemicals and chemical products and food products etc. as compared to the corresponding month of the previous year," the commerce and industry ministry said in a statement.

The Wholesale Price Index (WPI)-based inflation was 15.08 per cent in April and 13.11 per cent in May last year.

Considering the old series, the last time WPI inflation was higher than this was in August 1991, when it was at 16.06 per cent.

Inflation in food items crossed the double-digit mark after a gap of 4 months as vegetables, potato, wheat and protein-rich items saw the price rise. Inflation in onion, however, saw easing at (-) 20.40 per cent.

Inflation in food articles in May was 12.34 per cent, against 8.35 per cent in the previous month. The last time, it had recorded the double-digit print was in January at 10.40 per cent.

The rate of price rise in vegetables was 56.36 per cent, potato (24.83 per cent), wheat (10.55 per cent) and egg, meat and fish (7.78 per cent).

In the fuel and power basket, inflation was 40.62 per cent, while in manufactured products and oil seeds, it was 10.11 per cent and 7.08 per cent, respectively.

Inflation in crude petroleum and natural gas was 79.50 per cent in May.

Retail inflation in May eased to 7.04 per cent, from 7.8 per cent in April, but remained above the Reserve Bank's inflation target for the fifth straight month.

To tame stubbornly high inflation, the RBI hiked its key interest rate by 40 basis points in May and 50 basis points in June.

The central bank, last week, also raised the inflation projection by 100 basis points to 6.7 per cent for 2022-23.

Icra Chief Economist Aditi Nayar said a surge in inflation in the primary food articles -- particularly vegetables and eggs, meat and fish -- on account of extreme weather conditions and rising input costs, such as fodder prices, pushed up the headline inflation print.

Additionally, higher inflation was witnessed in the minerals, crude petroleum and natural gas and fuel and power segments, reflecting the increasing global commodity and crude oil prices, Nayar added.

With inflation in industrial raw materials remaining stubbornly entrenched, core inflation is likely to remain elevated above 9 per cent over the next few months, she said, adding the weakening of the rupee and hardening of crude oil prices would transmit faster to the WPI than the CPI.

"Given the weight of oil and fuel items in the WPI basket, the rise in global crude oil prices is expected to put upward pressure on the headline WPI print for June 2022. Further, the weakening of the Rupee against the US dollar is likely to augment the landed cost of imports in the month, posing upside risks to the headline number. Consequently, we expect the WPI inflation to remain elevated at 15-16 per cent in June 2022," Nayar said.

The rise in the WPI inflation, in contrast to the easing in the CPI inflation in May 2022, may imbue some caution into the outlook for monetary policy actions.

"We continue to expect 60 basis points of repo hikes over the next two policy reviews," Nayar added.

Fitch Ratings too projected that the Reserve Bank would raise interest rates by 100 basis points further to 5.9 per cent by December 2022 on a deteriorating inflation outlook.

India Ratings and Research said there is no clarity on Russia Ukraine conflict, the crude oil prices continue to be volatile and have once again increased to USD 124.99/ barrel as of June 6 after averaging USD 113.11/barrel in May and USD 104.89/ barrel in April.

Ind-Ra believes that the wholesale inflation will remain firm and in double digits in the foreseeable future, which in turn, is expected to put pressure on retail inflation.

It expects retail inflation to average 6.9 per cent in the current fiscal, thereby more monetary tightening going forward.

"Ind-Ra expects another 50-75 basis points hike in repo rate during remaining FY23," it said.

CRCL LLP CEO and Managing Partner DRE Reddy said higher crude oil prices and input costs still weigh on the producers, and pass-through has resulted in pushing the retail inflation higher.

"This move also implies that manufacturers are recovering their pricing power, which was weakened due to the pandemic. A good monsoon and ease in (Russia-Ukraine) tension will assist to lower WPI inflation within the following months, also leading to crude oil prices ultimately putting downward pressure on inflation at large," Reddy added.