Oil prices fuel WPI to record high of 12.94%

New Delhi: Rising prices of edible oilsand protein rich items pushed the retail inflation to a six-month high of 6.3 per cent in May, breaching the comfort level of the Reserve Bank and thus rendering reduction in interest rates a difficult proposition in the near term. Wholesale price-based inflation (WPI) too accelerated to a record 12.94 per cent in May on account of rising prices of crude oil, manufactured goods and the low base of last year due to the Covud-19 lockdown.

The government has asked the Reserve Bank to keep the retail inflation at 4 per cent with a margin of 2 per cent on either side. CPI inflation has breached the upper band of the inflation target about 10 times since the first meeting of the Monetary Policy Committee (MPC), which decides the key interest rate, in October 2016. While the Consumer Price Index (CPI)-based inflation rose from 4.23 per cent in April to a six-month high of 6.3 per cent, food inflation soared from 1.96 per cent to 5.01 per cent in May.

The previous high in retail inflation was 6.93 per cent in November 2020. In May 2020, the Wholesale Price Index (WPI)-based inflation was (-) 3.37 per cent and in April 2021, it hit double digits at 10.49 per cent. This is the fifth straight month of uptick seen in WPI inflation.

As per the data on CPI, factored in by the RBI while arriving at its monetary policy, the steepest price rise was witnessed in the 'oils and fat' segment, which on an annual basis showed an increase of 30.84 per cent.

The May CPI data released by the National Statistical Office (NSO) further revealed that the rate of price rise in 'meat and fish', 'egg', 'fruits', and 'pulses and products' stood at 9.03 per cent, 15.16 per cent, 11.98 per cent, and 9.39 per cent, respectively. The rate of price rise in the 'fuel and light' category quickened to 11.58 per cent.

As per the WPI data, released by the Commerce and Industry Ministry, the wholesale inflation in fuel and power basket spiked to 37.61 per cent during May, against 20.94 per cent in April, amid hardening of global commodity prices. In manufactured products, WPI inflation stood at 10.83 per cent in May, against 9.01 per cent in the previous month. However, the wholesale inflation in food articles eased marginally to 4.31 per cent in May, even as onion prices spiked. The rate of price rise in onion stood at 23.24 per cent in May, as against (-)19.72 per cent in April.

Commenting on the CPI data, Aditi Nayar, Chief Economist at ICRA Limited, said the retail inflation has hardened to a six-month high in May, with an alarming 207 bps jump relative to April. "We have raised our forecast for the FY2022 average CPI inflation to at least 5.4 per cent. However, we believe the MPC will demonstrate a high tolerance even if the average CPI inflation ranges between 5.5-6 per cent in FY2022, given the uncertainties regarding the growth outlook. Therefore, we continue to expect a status quo on the repo rate and a continuation of the accommodative stance through 2021," she said.