Record spike in WPI inflation: Cause, effect

WPI inflation has been in double digits for the thirteenth months in a row now. According to the data released last week, retail inflation had also surged to an 8-year high of 7.79 per cent in April. As such, another round of repo rate hike is expected in June, with its quantum being as high as 40 basis points.

What caused the spike?

The heatwave led to a spike in prices of perishables such as fruits, vegetables and milk, which, along with a spike in tea prices, pushed up primary food inflation.

The core-WPI inflation rose to a four-month high of 11.1% in April, with producers forced to pass on the input price pressures. Fuel inflation rose to 38.66 per cent, while inflation for manufactured products rose to 10.85 per cent.

Much of the inflation spike is being seen as a result of the Russia-Ukraine conflict, with the contribution in retail inflation being seen at three-fourths of the index.

What will be the impact of high inflation rates?

With WPI inflation remaining in double-digits, the probability of a repo hike in the June monetary policy has risen further.

“We expect a 40 bps hike in June 2022 followed by a 35 bps rise in August 2022, amidst a terminal rate of 5.5% to be reached by mid-2023,” Aditi Nayar, the Chief Economist of ICRA, said.

“With the source of inflation being global supply issues and not exuberant domestic demand, we maintain our view that overtightening will douse the fledgling recovery without having a commensurate impact on the origins of inflationary pressures,” she added.

On May 4, after an unscheduled meeting of its Monetary Policy Committee, the RBI raised the Repo rate by 40 basis points to 4.40 per cent and the CRR by 50 basis points to 4.50 per cent.

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