Onions drive WPI inflation to 6-month high

Food inflation in Aug at 3-year high; RBI unlikely to ease rates at review later this week, say economists

Inflation in onions rocketed to 244.6 per cent in August against an already high 119.4 per cent in the previous month, jacking up the rate of wholesale price rise to a six-month high of 6.1 per cent from 5.8 per cent in July, official data showed on Monday.

According to data released last week, retail price inflation had softened to 9.52 per cent in August against 9.64 per cent a month before.

Ironically, onion prices can't be brought down by interest rate policy but seems set to desist new Reserve Bank governor Raghuram Rajan from easing the central bank’s monetary stance in its mid-quarter review later this month, even as economic growth crashed to a four-year low of 4.4 per cent in the first quarter of 2013-14, economists said.

On the other hand, inflation in manufactured products further fell to 1.9 per cent from 2.81 per cent, despite depreciation of the rupee increasing imported inflation. This showed that demand in the Indian and global economy remained subdued. Fuel inflation inched up to 11.34 per cent from 11.31 per cent, even as the government raised petrol prices by 70p a litre and diesel by 50p a litre from midnight of July 31.

At a time when agriculture is the primary hope in the economy, food inflation surged to a three-year high of 18.2 per cent in August against 11.9 per cent in July. The culprit was mainly vegetables and within that, onions. Inflation in onions remained over 90 per cent in 2013 till August. At this time last year, onions prices fell 21 per cent, which could also be a reason for magnifying the rate of price rise in August.

It is not that every item in food saw a rise in inflation. Cereals, both rice and wheat, saw a decline in the rate of price rise. Even then, cereal inflation was at an elevated level, particularly rice. Inflation in cereals fell to 14.35 per cent from 17.66 per cent. The rate of price rise in rice declined to  20.13 per cent from 21.15 per cent, while wheat saw a steep fall to 6.33 per cent from 13.42 per cent.

Prices of pulses declined for a successive month and the rate of decline accelerated to 14.4 per cent against 7.39 per cent earlier.

However, other protein-based items saw a rise in inflation. Egg, meat and fish inflation increased to 18.86 per cent from 10.94 per cent and milk saw it rising to 5.63 per cent from 2.35 per cent.   

“We have not been able to control inflation so far and it has seen an upward trend in past few months. Inflation primarily rose due to a rise in food articles,”said Madan Sabnavis, chief economist, CARE Ratings.

This has further boosted expectations that Rajan might not be able to cut rates at his review on Friday.  Siddharth Shankar of financial information firm KASSA said, “Food inflation has risen majorly and the whole number has risen because of this. Overall numbers would not let RBI cut rates but food-led inflation is not monetary policy- dependent.”

The core inflation (manufactured items sans food articles) fell futher to 1.9 per cent in August from 2.3 per cent. The low rate of price rise in manufactured items and core inflation should have been ideal conditions for RBI to cut rates but the party is being spoilt by food articles.

"Interest rate cuts have been off the table for several months now and with the rupee still vulnerable and inflation now rising, there is an outside chance of a near-term rate rise," said Moody's Analytics, a research and analysis wing of Moody's Group. It said interest rates would remain on hold across the medium term.

Moody's said WPI inflation might hold in the range of six to seven per cent for the remaining part of the year. RBI had said it would make all efforts to ease inflation to five per cent by March 2014.