Why Inflation and WPI is down, but not (all) prices


  • The headline retail inflation rate fell to a 25-month low in May and the wholesale price index (WPI) is now deep in the red, but groceries and household items continue to appear expensive to most Indians.
  • While some of the decline in year-on-year inflation rates is statistical, prices of cereals, milk, spices, prepared meals, snacks, and sweets, as well as the costs of education, personal care items, and household goods and services continue to pinch consumers’ pockets.

Factors responsible

  • While a high base effect (the impact of the corresponding base, or period of the previous year on current growth estimates) has helped ease the headline number (which has been on a downward trajectory for the last four months and fell below 5% in April and May), the inflation rate for some household items continues to be sticky.
  • Core inflation — the non-food, non-fuel segment — will likely stay around 5% in the near term.
  • A high base also helped in a sharp decline in the WPI-linked inflation rate, which is expected to pass through to retail inflation with a lag.
  • Data released last week showed wholesale inflation at a seven-and-a-half-year low of (-)3.48% in May on the back of a high base effect, easing global commodity prices, food, fuel, primarily articles, and manufactured items.
  • The wholesale inflation rate was in double digits during April-September 2022, and reached 16.63% in May 2022.

Which items have displayed high inflation rates?

  • Food and beverages: They carry a weight of 54.18% in the Consumer Price Index (Combined), ‘cereals and products’.
    • They have remained in double digits since September 2022 (when it recorded a 11.53% inflation rate), peaking to 15.27% in March 2023.
  • Cereals and products: They has a weight of 12.35% in the CPI, saw the inflation rate fall to 13.67% in April and 12.65% in May.
  • Milk and products: This category too has seen an inflation rate of more than 7% since September 2022, peaking at 9.65% this February.
    • The inflation rate for this category (with a weight of 7.72% in the CPI) eased to 8.85% in April, but rose to 8.91% in May.
  • Spices and ‘prepared meals, snacks, sweets: Inflation rate has been sticky in ‘spices’ and ‘prepared meals, snacks, sweets’ as well.
    • Over the last one year, barring May 2022, the inflation rate for spices (weight of 3.11%) has remained in double digits, peaking to 21.09% in January this year. In May, it was recorded at 17.9%.
    • Prepared meals, snacks, sweets too have recorded a 6%-plus inflation rate in the last one year.
  • Non-food items: In it, the inflation rate for household goods and services; although easing to 6.05% in May from 6.46% in April and 7% in March, has remained above 6% for the last one year.
  • Education: It has a weight of 3.46% in the index, has seen inflation above 5% since July 2022.
  • Personal care and effects: The inflation rate in the ‘personal care and effects’ category has been rising steadily, with the latest print for May at 9.2% from 9% in April.

Where has inflation recorded a downward trend?

  • The ‘meat and fish’ category has been in the deflationary zone for the last three months, with (-)1.29% in May, (-)1.23% in April, and (-)1.42% in March.
    • The gains in inflation have come mainly due to a high base of 6.97% in April 2022 and 8.23% in May 2022.
  • The ‘oils and fats’ category, which has a weight of 4.21% in the CPI, has recorded a sharp decline in inflation, remaining in negative territory for the last four months.
    • The inflation rate was (-)16.01% in May and (-)12.03% in April, compared with 13.26% in May 2022 and 17.28% in April 2022.
    • In index terms, the category has seen a sharp decline to 170 in May and 174.9 in April from 202.4 and 199.5 in the corresponding months last year.
  • A high base has also helped ease inflation for fruits and vegetables.
    • Though vegetables saw a month-on-month increase of 3.34% in May, it has remained in the negative zone for the last seven months on a year-on-year basis.
    • The inflation rate for vegetables was in double digits during April-September 2022, and entered negative territory thereafter.

What kinds of inflation risks lie ahead?

  • Concerns remain over the potential impact of a poor monsoon on food inflation in the second half of this fiscal.
  • The development of El Nino conditions would be closely monitored as these could lead to a sub-par monsoon and impact kharif yields and rabi sowing, and thereby impact crop output and food inflation.
  • The headline CPI inflation may rise mildly to 4.5-4.7% in June 2023 from 4.3% in May 2023, based on the early uptrend in the prices of most of the food items, barring edible oils.
  • Milk prices continue to rise, cooking oil prices continue to fall amid lower import costs, but sugar is at risk amid rising global prices.
  • Cereal prices may rise in June given early trends.
  • Given the largely seasonal rise in food prices, we think food inflation is likely to remain manageable, but should rise on a y-o-y basis in H2 FY24.
  • Among non-food items, core inflation is sticky due to persistence in health, education costs, and in the personal care and effects category, experts said.


  • A long-term increase in the general price level of goods and services in a given economy.
  • It considers the pricing of most everyday or standard products and services, such as food, clothes, housing, recreation, transportation, consumer staples, etc.
  • Calculated as the average change in a basket of goods and services price over time.
  • It is positive when it helps improve consumer demand and consumption, and operate economic growth. Even inflation is meant to keep deflation in check and is a drag on the economy.

Types of Inflation

  • Demand-Pull Inflation
    • It occurs when the total demand for products and services grows faster than the economy’s production capability.
    • It produces a demand-supply mismatch, with increased demand and lower supply, resulting in higher prices.
    • This sort of inflation happens when the money supply expands; government spending grows, indirect taxes fall, and so on.
  • Cost-Push Inflation
    • Defined as an increase in the cost of production elements such as labor, raw materials, etc.
    • As the cost of production increases, inflation rises due to which companies strive to maintain profit margins by raising prices or offering goods and services at the same price but in fewer quantities. Cost-push inflation occurs in these situations.
    • Increases in the cost of manufacturing, decrease in output (production), increases in indirect taxes, increases in the price of imported commodities, and other factors contribute to this inflation.
    • Inflation may be classed into mild inflation, galloping inflation, hyperinflation, and so on, depending on the price increase.
  • Creeping inflation / Low Inflation
    • Refers to a period of time where prices are slowly rising.
  • Galloping Inflation
    • It occurs when the economy’s prices of goods and services grow at a double-digit (i.e., 15%, etc.) or triple-digit (i.e., 100%, etc.) pace each year.
    • Inflation that is galloping is also known as jumping inflation or running inflation.
  • Hyperinflation
    • It occurs when the pace of growth in the prices of goods and services is remarkably rapid and occurs over a short period of time.

Impact of Inflation

Positive impact Negative impact
Stimulates Economic Growth: Inflation kept at a modest level fosters economic growth by increasing firms’ profit margins in the near run, encouraging them to boost output and supply.
People’s level of life is lowered when their discretionary money is reduced.
It signifies that there is no demand shortage in the economy, which raises profitability expectations and encourages businesses to invest and expand production capacity.
Inflation inhibits export and stimulates imports, widening the deficit and reducing FOREX reserves, deteriorating the Balance of Payments Account.
With an increase in the overall price level, each unit of currency can buy fewer goods and services; this implies that inflation diminishes the buying power of money– the currency loses its actual value as a medium of exchange as well as a unit of account within the economy.
Inflationary pressures may lead to shortages of products if people begin stockpiling in anticipation of future price increases.