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Did CPI inflation show a lag impact of food prices in Sept?

Rising food prices on consumer prices front affected the simultaneous rise in the retail and WPI numbers in September

Indivjal Dhasmana  |  New Delhi 

High Inflation
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After diverging for two months, both Wholesale Price Index (WPI)-based and its Consumer Price Index (CPI) counterpart rose in September. From here, could see downward pressure in both the indices, though some economists expect CPI-based to remain high for a few more months.

In September, wholesale inflation was 6.46 per cent, while retail inflation was 9.84 per cent. The simultaneous rise in WPI- and CPI-based inflation in September can be explained by the lag effect of rising food prices on consumer prices. “Consumer price inflation is correcting the huge gap we had witnessed in food items at retail and wholesale levels in the previous months,” said Soumya Kanti Ghosh, chief economist at State Bank of India.

While inflation rose from 5.16 per cent in June to 5.85 per cent in July and further to 6.10 per cent in August, inflation declined from 9.87 per cent to 9.64 per cent and further to 9.52 per cent in these respective months. In May and June, both the indices had moved in the same direction.

CARE Ratings Chief Economist Madan Sabnavis said the divergent trend in July and August could be explained by the fact that retailers couldn’t increase prices at the same rate as wholesellers and, therefore, had to squeeze their margins.

Why then, did the two indices rise in September? Sabnavis said each food item had a different weight on the CPI, and this could be responsible for the trend.

Food items have about 45 per cent weight on the and 24 per cent on the (while raw food has 14 per cent weight, processed food items have 10 per cent weight). As it is, food inflation is primarily the rate of price rise for raw food items.

Sabnavis said from October, the arrival of kharif crops would impact inflation. An India Ratings analysis said though vegetable prices had increased due to adverse weather conditions and supply shocks through the past few months, the onset of winter was likely to provide a breather. Typically, the supply of fresh vegetables and fruit increases during winters.

Moreover, wastage of fruit and vegetables declined in winters, as the shelf lives of these items, even in the absence of proper refrigeration, increased due to favourable weather conditions, the analysis said.Ghosh said inflation might touch double digits, as the gap between CPI food inflation and its counterpart corrected further.

At 700 basis points, the gap between food inflation in the two indices was high in September. While CPI food inflation was 11.44 per cent, WPI food inflation was 18.4 per cent. Non-food CPI inflation, too, might rise further, as high wholesale prices of textiles and leather were rubbed into CPI data for, say, clothing and footwear, Ghosh said.

YES Bank chief economist Shubhada Rao said she expected the two indices to diverge again.

While WPI inflation was expected to rise to seven-7.5% by the end of this financial year, its CPI counterpart was likely to fall to eight-8.5 per cent, she added.

First Published: Wed, October 16 2013. 00:46 IST