New Delhi: Wholesale inflation slowed the most in about five years as commodity and crude prices continued to decline, raising hopes that sticky consumer inflation may start moderating as well, giving the central bank room to cut interest rates to help support economic recovery, with governor Raghuram Rajan saying there’s some way to go before that happens.
Inflation based on the wholesale price index (WPI) came in at 3.74 per cent in August, a sharp drop from 5.19 per cent in July, and lowest since October 2009, according to data released by the commerce & industry ministry on Monday.

“Emerging trends in global commodity prices led by crude oil and restrained increase in food prices so far suggest that WPI inflation could ease further to 3.00-3.25 per cent in September,” said Shubhada Rao, chief economist, Yes Bank.

This is the third successive month in which the wholesale inflation rate has dropped. Retail inflation, the key policy determinant, has been declining less quickly, registering at 7.8 per cent in August versus nearly 8 per cent in July.

The two are not strictly comparable with differing weights ascribed to commodities in WPI and inclusion of services in the consumer price index (CPI). While part of the decline is also statistical — the high base effect of last year—slowing WPI should have a moderating influence on retail inflation with a lag.

Crude prices fell to a two-year low on Monday but RBI governor Rajan this could be a “temporary phenomenon”, urging the government to end fuel subsidies. The improved monsoon has also reduced pressure on food prices.

“Unless trade margins go up substantially, we should expect CPI-based inflation to also decline by the next month or so,” said Pronab Sen, chairman, National Statistical Commission.

“Inflation will be on a downward trajectory in the next few months due to the base effect, and will climb up after that. We expect an 8per cent average inflation for the current fiscal,” said DK Joshi, chief economist, Crisil.

Food inflation stood close to 20 per cent and overall inflation well over 7 per cent between September-December last year. The central bank is unlikely to ease its current stance at the September 30 policy announcement.

“Notwithstanding drop in global commodity prices as well as moderation in core-CPI and core-WPI in August, we expect RBI to maintain a cautious stance and keep repo rate unchanged in the upcoming policy review,” said Aditi Nayar, senior economist, ICRA.
Inflation in food articles was down to 5.15 per cent in August (8.43 per cent in July). August wholesale vegetables prices were 4.88 per cent lower from a year ago.

Fuel inflation also slowed sharply to 4.54 per cent in August from 7.4 per cent in July because of the fall in global crude prices that has allowed a cut in petrol prices and other decontrolled products. Petrol prices were down 0.15 per cent in August from a year ago.

Global crude prices fell below $100 per barrel last week, which is expected to result in a cut in fuel prices. Inflation could fall further if diesel prices are cut, as expected.

Core inflation, which excludes volatile food and fuel, eased to a sevenmonth low in August, though only marginally to 3.45 per cent from 3.58 per cent in July. This measure is watched closely by central banks for the level of demand. Industry was hopeful about a rate cut though.

“With strong actions coming in, we are hopeful of a sustained moderation in inflation. Coming shortly before the monetary policy, this should also provide the necessary maneuvering space to the RBI,” said Chandrajit Banerjee, director general, Confederation of Indian Industry.