Softening of WPI inflation to cut production costs, demand surge for consumption

New Delhi: The softening of wholesale price index (WPI) inflation in August on the back of decline in prices of food articles, especially vegetables and milk is encouraging, which will lead to reduction in production costs and increase in demand for consumption within the country, industry experts said on Tuesday.

The lower-than-expected WPI number is primarily owing to a fall in fuel and electricity components as global crude prices have softened given the Chinese demand worries as well as headwinds in Europe and the US.

“The vegetables component has also dropped significantly that is expected given the boost in production that takes place during monsoon months,” said Ranen Banerjee, Partner and Leader, Economic Advisory, PwC India.

The WPI inflation further eased to a four-month low of 1.31 per cent in the month of August, compared to 2.04 per cent in July.

Food inflation softened from 3.4 per cent in July to 3.1 per cent in August, supported by an above-normal monsoon.

“WPI softened as a result of decline in natural gas and crude oil prices, which went from 9.1 per cent in July to 1.7 per cent in August, amid deepening geo-political uncertainties,” said Sanjeev Agrawal, President, PHDCCI.

The core WPI inflation dipped to 0.7 per cent in August from 1.2 per cent in July, amid a continued softening in global commodity prices.

Banerjee said the high intensity of rainfall in many areas and extent of consequent damages to crops will determine the food inflation trajectory and hence, we can expect the RBI MPC to be cautious and continue with its pause on policy rates in its next meeting.

In August, India's retail inflation was 3.65 per cent but remained below the Reserve Bank of India's (RBI) target of 4 per cent. The RBI has fixed a mid-term target of 4 per cent for retail inflation before it goes in for a cut in interest rates to rev up growth.