WPI inflation drops to 4-month low of 4.53% on cheaper food prices

Inflation based on wholesale prices eased to a four-month low of 4.53 percent in August on softening of food prices, but experts warned that a sliding rupee and rising oil prices could prompt an interest rate hike by RBI.

The effect of rising petrol and diesel prices has been neutralized by deflation in food articles, which resulted from a lower wholesale price index (WPI) inflation for August.

The WPI-based inflation stood at 5.09 percent in July and 3.24 percent in August last year.

According to government data released Friday, food articles registered deflation at 4.04 percent in August 2018. Last month, deflation in this category was 2.16 percent.

Deflation in vegetables was 20.18 percent in August, as against 14.07 percent in the previous month.

Inflation in the 'fuel and power' basket was 17.73 percent in August as prices of domestic fuel increased, in line with high global crude oil rates and a depreciating rupee.

While inflation in liquefied petroleum gas (LPG) was 46.08 percent, in diesel and petrol it was 19.90 percent and 16.30 percent, respectively, during August.

ICRA Principal Economist Aditi Nayar said core inflation hardened to a series high 5 percent in August, from 4.8 percent in July, a signal that firms with pricing power are beginning to transmit the weaker rupee and rising costs associated with industrial inputs such as fuels, to final prices.

"The rise in the core-WPI inflation in August 2018, in addition to the risks posed to the outlook for the CPI inflation by the INR depreciation, elevated crude oil prices and revision in MSPs, appear likely to prompt a majority of the MPC members to vote for a rate hike in the October 2018 policy meeting," Nayar said.

RBI's fourth bi-monthly policy review is slated on October 5.

Industry chamber CII, however, said that a decline in both wholesale and retail inflation would boost sentiments and a rate cut by the RBI at this juncture will help revive the investment cycle.

"The decline in the inflation reading, which is in line with the RBI's medium-term inflation target, should induce the RBI to resume the accommodative policy stance to support the incipient recovery currently underway in the economy which in turn would trigger the investment cycle by lowering the borrowing costs of industry," CII Director General Chandrajit Banerjee said.

During August, among food articles, potato inflation continued to rule high at 71.89 percent, while onion and fruits witnessed deflation of 26.80 percent and 16.40 percent, respectively.

Deflation continued in pulses at 14.23 percent in August.

The 4.53 percent inflation is the lowest in four months, and a lower inflation than this level was last seen in April at 3.62 percent.

As per the data, the WPI inflation for June was revised downwards to 5.68 percent from the provisional estimate of 5.77 percent.

Brent crude oil price is hovering at around USD 79 a barrel. This, along with a depreciating rupee has increased the oil import bill, thereby making petrol and diesel costlier.

The rupee has depreciated over 12 percent since the beginning of 2018 and is currently trading around 71.90 to a dollar.

Petrol price Thursday climbed to an all-time high of Rs 81 per liter in Delhi, while in Mumbai it inched up to Rs 88.39. A liter of diesel in the national capital was priced at Rs 73.08 and Rs 77.58 in Mumbai.

Data released earlier this week showed retail inflation eased to a 10-month low of 3.69 percent in August. RBI mainly takes into account retail inflation data while formulating monetary policy.

In its third monetary policy review for the fiscal, the Reserve Bank last month hiked interest rate by 0.25 percent to 6.5 percent on inflationary concerns.

For July-September, RBI pegged CPI-based retail inflation at 4.2 percent, which it saw firming up to 4.8 percent in the second half of the current fiscal.