WPI inflation spikes to 4-year high of 5.77% in June

RBI targets to keep inflation at 4 per cent, (+/- 2 per cent), and its rise beyond this comfort zone will put pressure on the central bank to hike rates.

Inflation based on wholesale prices accelerated to over 4-year high of 5.77 per cent in June on increasing prices of vegetables and fuel items, raising chances of rate hike by the RBI in its monetary policy review next month.

The Wholesale Price Index (WPI) based inflation stood at 4.43 per cent in May and 0.90 per cent in June last year, as per the government data released on Monday.

Inflation is at the highest level since December 2013, when it was at 5.9 per cent.

Retail inflation, which the Reserve Bank of India takes into account while formulating its monetary policy, had touched a 5-month high of 5 per cent in June.

It is based on Consumer Price Index (CPI).

RBI targets to keep inflation at 4 per cent, (+/- 2 per cent), and its rise beyond this comfort zone will put pressure on the central bank to hike rates.

As per the latest WPI data, inflation in food articles stood at 1.80 per cent in June, as against 1.60 per cent in the preceding month.

Inflation in vegetables jumped to 8.12 per cent last month, from 2.51 per cent in the previous month.

Inflation in 'fuel and power' basket too rose sharply to 16.18 per cent in June from 11.22 per cent in May as prices of domestic fuel increased during the month in line with rising global crude oil rates.

Potato inflation was at a peak of 99.02 per cent, against 81.93 per cent in May. Price rise in onion was 18.25 per cent during June, as against 13.20 per cent in the preceding month.

However, deflation continued in pulses at 20.23 per cent in June.

The WPI inflation for April was also revised upwards to 3.62 per cent from the provisional estimate of 3.18 per cent.

ICRA Principal Economist Aditi Nayar said the lagged transmission of higher crude oil prices, an uptick in cotton prices and electricity tariffs, the hardening of inflation for manufactured products as well as an unfavourable base effect, led to the sharp pickup in  inflation in June.

"The sharper than expected uptick in the WPI inflation in June 2018 reinforces our expectation of a likely repo rate hike at the next monetary policy committee meeting in August 2018," she said.

While hiking interest rate after a gap of more than 4 years, RBI had projected retail inflation to rise to 4.7 per cent in the October-March period of the current fiscal, as against the earlier projection of 4.4 per cent.

In its second monetary policy review for the fiscal, the Reserve Bank last month hiked interest rate by 0.25 per cent -- the first hike in more than four years -- due to growing concerns about inflation stoked by rising global crude oil prices as well as domestic price increases.

The price of Indian basket of crude surged from $66 a barrel in April to around $74 currently.

The next meeting of the RBI's interest rate fixing panel is from July 30 to August 1.

Photograph: Francis Mascarenhas/Reuters