Wholesale inflation surges to 15-month high of 2.61% in May

Wholesale inflation rose to a 15-month high of 2.61% in May from 1.26% in April as food inflation rallied further and global metal prices fed into manufactured product inflation, data released Friday showed.

Manufactured products, which account for nearly two-thirds of weight in the Wholesale Price Index (WPI), returned to inflation for the first time since February 2023 with a 0.78% rise last month.

Experts said rising wholesale prices will likely feed into retail inflation in the coming months.

"While WPI was in deflation all of last year (FY24: -0.7%), we expect the rise in wholesale prices this year to gradually feed into retail prices if firms' pricing power improves and consumption revives," said Shreya Sodhani, regional economist at Barclays. Consumer inflation declined to a 12-month low of 4.75% in May, reducing the gap between wholesale and retail inflation to the lowest level since October 2022.

The easing in retail inflation came despite sticky food inflation at 8.7%. Food inflation is likely to remain a concern, pushing the Reserve Bank of India (RBI) to hold the policy rate at the current 6.5% level until October, some experts said. "Elevated food inflation at the wholesale level is worrisome as this would keep retail food prices firm even going forward. Retail food inflation has been above 8% for the past seven months," India Ratings and Research (Ind-Ra) economists Paras Jasrai and Sunil K Sinha said in a report. The central bank's Monetary Policy Committee held the policy rate unchanged for the eighth consecutive time at its meeting earlier this month.

Food prices rise
Sequentially, wholesale prices in May were up 0.2% from the previous month, with the food index rising 1.14% and manufactured products up 0.64%.

Within food, paddy remained in double-digit inflation for the fourth consecutive month while pulses, vegetables, potatoes and onions continued to remain in high double digits.

Potato inflation was 64.1% in May, with its third consecutive over-50% reading. Onion inflation was 58.1% last month whereas other vegetables exhibited 32.42% growth, intensifying from 23.6% in the previous month.

Core inflation rose 0.4% in May after 14 months of deflation.

"An uptick in global metal prices has contributed to an increase in inflation in the manufacturing category. A significant mismatch in global demand and supply of metals has pushed global metal prices higher," said Aditi Gupta, economist at Bank of Baroda.

Economists note that wholesale inflation is expected to rise further in the coming months and is expected to stay above 2% for the second quarter as well.

"Ind-Ra expects the WPI inflation to increase further to 3.5% in June 2024, largely due to a low base. However, it would be trending lower to around 2.5% in 2QFY25 due to a high base of food items," Jasrai and Sinha noted.