Wholesale prices in deflationary zone

Wholesale price inflation entered the deflationary zone for the first time in over four years, reflecting sharp dip in demand due to the lockdown enforced to stem the spread of the coronavirus.

Inflation, as measured by the wholesale price index, contracted 3.2% in May compared to 2.8% growth in the same period in the previous year. This was the sharpest level of deflation witnessed since November 2015, economists said. The government had released some data only for April WPI and did not release the headline number due to the paucity of data, as several units were closed due to the lockdown and could not send responses.

The inflation based on WPI food index slowed from 5.2% in March to 2.3% in May, the lowest level in 16 months. The National Statistical Office too did not release the headline CPI inflation data and only provided some sectoral numbers, as there was no response from several units due to the lockdown.

The inflation in food articles moderated from 2.6% in April to 1.1% in May (7.3% in May 2019), largely led by a decline in vegetables (-12.5% to a 17-month low), onions (6.3% vis-a-vis 73.5% in April 2020) and food grains and pulses.

“Although the deflationary trend in wholesale prices is expected to persist even in the month of June, it would be above the May level. Inflation in the fuel and power segment will see an uptick as the government has increased LPG prices and rates of petrol and diesel have also gone up in domestic markets. We may see food prices continue to be pressurised as more than supplies, there have been distortions in supply chains across the country,” said Madan Sabnavis, chief economist at Care Ratings.

Some economists said the RBI will continue with its interest rate cuts. They said the extent of deflation in WPI in May was deeper than expected.

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