India's Wholesale Inflation Hits 16-Month High in June Amid Soaring Food Prices

India's wholesale inflation surged to a 16-month high of 3.36% in June, driven by rising prices of food, manufactured products, and primary articles, according to the Union commerce ministry's latest data. This significant increase marks a notable shift from the negative inflation rates recorded in much of 2023.

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Key Drivers of Inflation

Escalating Food Prices

Food inflation was the primary driver, climbing to 10.87% in June from 9.82% in May. Prices of cereals, wheat, paddy, onions, vegetables, and fruits saw significant increases. However, prices for pulses, eggs, meat, fish, and milk decreased, providing some relief.

Manufactured Products and Primary Articles

Manufactured product prices rose by 1.43% in June, compared to 0.78% in May. Primary articles, including essential natural goods, also contributed to the inflation rise.

Fuel and Power Costs

Fuel and power prices saw a modest increase of 1.03% in June, down from a 1.35% rise in May. Crude petroleum and natural gas prices surged by 12.55% in June, up from 9.8% the previous month.

Comparative Analysis

The Wholesale Price Index (WPI), a key measure of producers' prices, has been positive since November 2023, contrasting sharply with the -4.18% recorded a year ago. Between April and October 2023, WPI was negative, highlighting a significant turnaround.

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Expert Insights

Suman Chowdhury, chief economist at Acuité Ratings & Research, commented, "We expect WPI inflation to see a moderate rise in the near term due to increased inflation in manufactured goods. Fuel and power inflation will likely trend upward, though these pressures might be mitigated by a potential moderation in food inflation."

Chowdhury also highlighted potential impacts on Consumer Price Index (CPI) inflation: "WPI inflation pressures can adversely impact CPI-based inflation, which is expected to moderate in Q2FY25 due to a favorable base. While the Reserve Bank of India (RBI) projects headline inflation at 3.8% for the second quarter, there are upside risks without significant moderation in food inflation."

Retail Inflation Trends

Retail inflation increased to 5.08% year-on-year in June, up from a 12-month low of 4.75% in May, primarily due to higher food inflation, which makes up nearly 40% of the consumer price basket. CPI-based inflation has stayed below 5% since March and within the RBI's 2-6% tolerance range for ten consecutive months.

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Monetary Policy Implications

In June, the RBI kept the policy repo rate unchanged at 6.5%, indicating potential delays in interest rate cuts. The RBI's monetary policy committee maintained its rate pause, seeking clear signs of easing inflation amidst volatile food prices. Higher interest rates are crucial for controlling inflation, as they make borrowing more expensive, reducing demand and consumer spending.

Conclusion

The spike in wholesale inflation to a 16-month high underscores the ongoing challenges in managing price stability in India. Rising food prices and manufactured goods drive inflation, while non-food articles and the cautious RBI approach offer a balanced economic outlook. The coming months will be crucial to determining whether these inflationary pressures persist or ease, shaping the broader economic landscape.

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