Why inflation and WPI are down but not all prices

Why inflation and WPI are down but not all prices

Subject : Economy

Section: Inflation and unemployment

Key Points:

• The headline inflation measured by the Consumer Price Index (CPI) has moderated to around 5% the WPI is – 3.48% for the month of May. But still the household items seem expensive to ordinary people. This can be explained by the base effect and by examining the inflation for sub-categories that form the index.
• A high base effect (the impact of the corresponding base, i.e. the prices for the previous year which were already high) explains to a degree the lower headline inflation. The effect of reduced prices is further magnified by the base effect.
• A high base also helped in a sharp decline in the WPI-linked inflation rate, which is expected to pass through to retail inflation with a lag.
  • Wholesale inflation at a seven-and-a-half-year low of (-)3.48% in May on the back of a high base effect, easing global commodity prices, food, fuel, primarily articles, and manufactured items. The wholesale inflation rate was in double digits during April-September 2022, and reached 16.63% in May 2022.
• Within the consumption basket, the inflation rate for some household items continues to be sticky. Further the core inflation — the non-food, non-fuel segment — will likely stay around 5% in the near term.
• The ‘food and beverages’ category, carries a weight of 45.86% in the Consumer Price Index (Combined) has a major impact of inflation experienced by the households.
  • Most of the reduction in inflation is “statistical” while the inflation continues to remain sticky (i.e. not reducing)
  • ‘Cereals and products’, which has a weight of 12.35% in the CPI, saw the inflation rate fall to 13.67% in April and 12.65% in May.
  • inflation rate for ‘Milk and products’ category (with a weight of 7.72% in the CPI) peaked to 9.65% had eased to 8.85% in April, but again rose to 8.91% in May.
  • Education, which has a weight of 3.46% in the index, has seen inflation above 5% since July 2022.
  • The inflation rate in the ‘personal care and effects’ category has been rising steadily, with the latest print for May at 9.2% from 9% in April.