NEW DELHI: Inflation based on the Wholesale Price Index (WPI) unexpectedly shot up to a five-month high in May amid elevated cost of food, adding to worries that deficient rains and the conflict in Iraq could lead to deepening economic stress as the government seeks to revive growth.

Headline inflation accelerated to 6.01% in May against 5.2% in the previous month as potato and egg prices rose and core inflation picked up, data released by the ministry of commerce and industry showed on Monday. Stocks fell, the rupee weakened and bonds yields rose.
The benchmark BSE Sensex fell 37.69 points to 25,190.48, its lowest in more than 10 days. The rupee touched a one-and-a-half-month low of 60.1 against the dollar after the release of inflation data. India’s benchmark 10-year bond yield rose 3 basis points to 8.64%. A basis point is 0.01 percentage point.

The data surprised analysts, especially after inflation based on the Consumer Price Index (CPI) eased to a better-than-expected 8.28% in May from 8.59% in the month before. The central bank closely tracks consumer inflation while setting policy rates but WPI trends are also crucial.

“After a string of positive data surprises, the May WPI data disappointed with inflation rising across commodity groups,” Citi chief economist Rohini Malkani said in a note. However, given the base effect turning favourable from June onwards and likely government measures to rein in food inflation, Citi maintained its forecast of WPI trending down towards an average of 5.5% and CPI at 8% in FY15. “The space for monetary easing could therefore open up in 2015,” it said.

In the near term, the upside risks to inflation not only come from a possibly weak monsoon but also from the recent spike in crude oil prices on tension in Iraq. Fuel inflation climbed to 10.5% in May largely because of a Rs 1.3 per litre increase in diesel prices and a lagged revision in the electricity index. Fuel has a weight of 15% in WPI and 9.5% in CPI.
The sharp jump in manufactured inflation despite continued negative output gap and rupee stability suggest that any improvement in demand conditions in the medium term if unaccompanied by supply-side responses is also likely to be inflationary,” said Shubhada Rao, chief economist, Yes Bank.

Finance minister Arun Jaitley said the government is seized of the matter and is committed to ease supply-side constraints and asked state governments to take effective steps. “The rise in prices of food articles can also be attributed to withholding of stocks on account of apprehension of a weak monsoon. State governments should take effective steps to ensure that speculative hoarding is discouraged,” Jaitley said in a statement.

The government has already begun work on steps to be initiated to combat below-normal rain. The weather department has estimated monsoon rainfall at 93% of the long period average (over the last 50 years).

Prime Minister Narendra Modi called a meeting on Friday to discuss inflation and a contingency plan to deal with a deficient monsoon. With inflationary risks mounting, the commerce department is reviewing price data on milk and onions on a weekly basis and may look to restrict exports in the coming weeks.

Food inflation rose to 9.5% in May against 8.64% in April. Potato inflation was highest at 31.4% followed by fruits at 19.4% and eggs, meat and fish at 12.47%. Manufactured product inflation went up to 3.55% against 3.15% the month before. Core WPI inflation accelerated to 3.8% year on year in May from 3.4% last month, largely due to higher basic metals, wood and paper products inflation.
Industry called for urgent steps to get prices under control. “Spike in inflation, which has gone up to a five-month high of 6.01% during May 2014, essentially on the back of food and fuel prices, is a cause for concern,” said Chandrajit Banerjee, CII director-general.