The latest data on retail inflation released this week showed that due to a sharp fall in food prices, retail inflation came down to 3.8%, a drastic reduction as compared to 5.4% in the previous month and 7.4% in July last year. Since January 2015, the prices at the wholesale and retail level were seen moving in an opposite direction. The wholesale prices have been deflating by minus 2.5% year on year on an average while consumer prices were inflating at over 5.5%. The paradox seemed logical as consumers negotiate mostly with retail inflation in their day to day life. The wholesale price index (WPI), for the latest month of July 2015 at minus 4.05% indicates that prices at the mandi level have come down sharply in July as compared to the same month last year. Explaining the dichotomy, analysts say that "The WPI inflation is negative mainly because of a dramatic drop in global commodity prices, especially fuel, and tepid domestic demand conditions that have kept the prices of manufactured items from going up." Quote On
However, the food prices are consistently moving up even at wholesale front but its impact on the overall WPI inflation gets nullified due to its lower weightage in the WPI. The WPI and the CPI (consumer price index) are indices that have a certain number of commodities with each commodity having a specific weight in the index. Food has only 15% weight in the WPI. Therefore, any hike in food prices gets negated by the declining prices of the other two items — namely manufactured products and fuel that have a combined weight age of 75%. But the food component has a significant weight in the CPI basket — over 50% — and therefore, becomes the key driver of the CPI inflation. Moreover, expenditure incurred on health (doctor's fees), education (school fees) and on housing (rent) also drives up retail inflation because such services are part of the CPI only.
Does the gap between the wholesale and retail prices reflect the deficiencies on the supply side? The current gap between the wholesale and retail prices is about 8%. Typically, it is assumed that this gap constitutes trade margins coupled with the transportation cost. But if this gap widens too far then it suggests that someone is making unfair gains somewhere in between. The recent and abrupt price hike witnessed in onion prices confirms such popular fear. Analysts suggest that horticulture produce that inflames retail prices frequently needs supply side support (cold storages and other logistical support) to put an end to abrupt and unexplained price shocks at the retail level. Obviously this needs further investment which is not expected until India's archaic laws are revised.