Recent data on inflation trends points towards a softening movement in price levels in the wholesale price index (WPI), while the consumer price index (CPI) continues to stay at elevated levels, particularly in the food segment. Even before the lockdown was announced, food inflation remained higher in both, the WPI and CPI. This was mainly due to the supply constraint arising from crop damages caused by excessive and unseasonal rains. This hit in supplies has been causing an increase in the prices of most food items, such as vegetables, fruits and pulses. In December 2019, inflation in the consumer food price index (CFPI) peaked to 14.2%, and that in wholesale food price index (WFPI) stood at 11.2%. However, since the imposition of the lockdown, wholesale food prices decelerated sharply due to sudden decline in demand, whereas the prices for perishable food items such as vegetables and fruits, continued to remain elevated due to the inability of the farmers to take their supplies to markets. Although food inflation in the CPI eased slightly to 9.28% in May from 10.49% in April 2020, the gap between the WFPI and CFPI inflation rates continued to remain above 600 basis points.
Since the central bank had adopted the CPI as the key measure of inflation since April 2014, the WPI lost its significance as a policy variable of inflation control. The RBI has fixed a flexible target to maintain CPI inflation in the range of 2% to 6% with the median target of 4%, but there is no such target for the WPI. Hence, changes in the CPI assume more importance than those in the WPI for price management; moreover, the CPI is a better indicator of demand side pressures than the WPI.
Compressed demand due to the lockdown has led to a softening trend in inflation recently. However, if we closely observe past trends in the CPI, it is not just demand, but other contributory factors such as changes in taxes and volatility in commodity prices on some imports, that impact overall inflation significantly.
