India’s retail inflation, measured by the Consumer Price Index (CPI), is still above the RBI’s target range of 2-6%. The retail inflation rate for August 2022 stood at 7% compared to 6.7% in July. Surprisingly, this comes on the back of easing Wholesale Price Inflation (WPI). Read to know more!
Wholesale Price Inflation Eases
According to forecasts, Wholesale Price Inflation (WPI) will ease for the third consecutive month in August to stand at 12.9% on the back of easing international commodity prices. The official figure will be released later today.
The WPI has been on an upward trend since April 2021. As a result, companies like HUL, ITC and Maruti Suzuki took significant price hikes during this period to balance their profitability without denting demand. But these price increases were insufficient to cover all costs, which was reflected in their margins.
Why is Retail Inflation Still High?
If historical trends are to go by, the two indices, namely the CPI and WPI, have had an inverse relationship, which analysts attribute this inverse relationship to the pricing power of businesses.
As the difference between WPI and CPI will narrow, firms will not lower the prices for consumers immediately as they will look to restore their margins and increase their lost profitability during the high inflation days. As a result, retail inflation may take a bit longer to cool off!
What’s in it for Investors?
To tame inflation, the RBI has hiked the Repo Rate by 140 bps since May 2022. The Central Bank expects inflation to average 6.7% for FY23.
Investors and the RBI will have to wait quite a bit for retail inflation to fall below 6% as companies try to earn the previously lost spread and recover their profit margins. The drawback is that consumers and investors will not be able to reap the full benefits of easing international commodity prices immediately!
