WPI inflation at 4-month low of 5.43%: Here's why government cannot relax - Economic Times

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NEW DELHI: While economists and analysts have cheered the Wholesale Price Index (WPI) inflation easing to a four-month low of 5.43%, most are cautious on the sustainability of this downtrend especially with risks of drought looming large.

Wholesale prices rose 5.43 per cent year-on-year last month, their slowest pace since February, compared with 6.01 per cent in May. The fall was mainly on account of decline in prices of food items and vegetables with the exception of potato and onion.

As per WPI inflation, prices of vegetables as a category declined by 5.89 per cent during the month, while that of potato and onion soared by 42.51 per cent and 10.70 per cent respectively in the wholesale market.

Among other important items, prices of sugar and edible oils fell by 2.09 per cent and 0.75 per cent respectively during June.

However, adding to inflationary worries are prospects of a first drought in five years and turmoil in Iraq, which have increased the risk of a run-up in food and fuel prices.

Sajjid Z Chinoy of JPMorgan feels that fighting food inflation is a multi-quarter, multi-year fight. "Food inflation over the last 10 years has averaged 10.3%. If it was solvable in two or three or four quarters, it would not persist for a decade," he said.

"The one area where there is no trade off between inflation and growth, is on the food front. The government should try to find alternative supply chains for perishable fruits and vegetables, reduce MSP's growth, use buffer stocks of rice and wheat more aggressively, have a common food market for India," Chinoy told ET Now.

"Those are clearly win-win situations because they are not growth inhibiting. At the same time, they bring food inflation down. However, there is a structural dimension which will take several quarters," he added.

Says Radhika Rao, Economist at DBS Bank, "Inflation has come off headline as well as food inflation, it is a good sign. Manufacturing still seems to be a bit sticky. But one cannot draw a conclusion based on one data point. We will have to watch the July and the August figures more closely."

"The wholesale prices for many of the commonly used vegetables have fallen year on year, but have been rising on month on month basis. That is partly seasonal because of the summer season. It is also partly because of the prospect that the monsoons would be weak," she told ET Now.

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