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Food for thought...I thought you might want to ponder over...

What is the Inflation data really telling us?

Last week, everybody had a chance to look at India’s Wholesale Price Index for November and lo and behold, it was at a 30-year high! So in today’s Finshots, we explain inflation and see what the numbers are really telling us.

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Economy

The Story

To understand inflation in India, we need to go over a couple of things. First, there’s the Wholesale Price Index (WPI). It measures how prices are changing at the wholesale level — when goods are traded in bulk between businesses. Then, there’s the Consumer Price Index (CPI). It tells us about the change in prices of goods and services that we consume on a daily basis.

In other words, WPI affects businesses and CPI affects consumers. And while there is an obvious interplay between the two, they offer distinct insights. Take for instance India’s WPI figure at the moment. It stands at a whopping 14.2% — meaning prices have increased by a staggering 14% in November 2021, compared to the same period last year. In fact, we haven’t seen such highs since 1991!

And while some people would brush this off as an aberration, that assessment isn’t entirely accurate either. WPI has been heading upwards for a while now while CPI is still hovering at a modest 4.9%. Sure, the CPI figure isn’t something to boast of either, but it’s still not rising exponentially like the wholesale price index. Which means we need to look at this and ask — “Why the divergence?”

Well, truth be told, there’s still a lot of debate on why this is happening. Typically, whenever WPI and CPI diverge, everyone points to how the indices are constructed. Let’s take food for instance. 50% of the CPI is attributable to food prices alone. However, in the WPI index, food contributes only 15% to the final figure. The largest weights are assigned to “manufactured products”. This includes a lot of things that businesses use — like textiles, chemicals, cement, metals, etc.

So, a quick reading of the numbers will tell you that it’s the raw materials doing all the damage. And one popular theory explaining this figure goes something like this — Businesses are recovering faster from the pandemic. So, they’re demanding raw materials to produce more goods. And more demand inevitably leads to higher prices. But there have been disruptions in the supply chain as well. And when these disruptions don’t ease quickly, prices start climbing some more.

However, if businesses in India are experiencing high prices, why aren’t they passing it along to consumers? Why aren’t we feeling the pinch?

Well for starters, we are feeling the pinch. FMCG companies have slowly been hiking prices. Paint companies are revising their pricing structure. And cooking oil is on a tear. However, they haven’t been able to pass on all of their costs because they’re still tentative about demand. If people are still holding on to their purse strings, they have little incentive to hike prices. If they go against the grain and hike prices nonetheless, it may affect their business some more.

But make no mistake, companies can’t keep absorbing costs forever. Even on the services side (classified under miscellaneous), prices are rising. Telecom companies have hiked prices by 25% after a long hiatus. Recreation and amusement inflation is also at its highest since 2012. And restaurants are also taking a good hard look at their prices.

However, these don’t reflect all that well in the CPI, because as we noted, food and beverages dominate that index. If you remove food & beverages, as well as fuel, and measure the variation in prices elsewhere (called core CPI) — then you’ll see that figure is at a 5-month high — at 6.08%. So prices are rising across the board. It’s just that we have to be a little bit careful in drawing our conclusion from CPI and WPI index at such a time.

And here’s hoping that WPI inflation eases up in 2022. Because if it doesn’t it is likely that we will feel the pinch much harder soon enough.