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Will Retail Food Prices Follow The Jump In Wholesale Costs?

Will retail food costs rise following the sharp surge in wholesale food inflation?

Photographer: Dhiraj Singh/Bloomberg
Photographer: Dhiraj Singh/Bloomberg

Wholesale inflation in India rose for a second consecutive month led by a continued sharp rise in food inflation, showed data released by the government on Monday.

Inflation as measured by the Wholesale Price Index rose to 3.18 percent in March 2019 with prices of vegetables, pulses and cereals rising. This pushed WPI food inflation to 5.68 percent in March 2019 from -3.24 percent just a few months ago in November 2018.

While retail food prices have also started to rise, the pace of increase has been more muted. CPI food inflation has moved from -1.69 percent in November 2018 to 0.66 percent in March 2019.

Typically, higher wholesale prices feed into retail prices but the correlation has weakened in the last two years, shows BloombergQuint’s analysis.

The correlation coefficient between WPI and CPI food indices has steadily declined. It has fallen from 0.915 percent in FY17 to 0.477 percent in FY19, showed the analysis.

In a note on Friday, Soumya Kanti Ghosh, chief economist at State Bank of India had pointed to this weakened correlation and noted that higher wholesale food prices may not necessarily feed into retail costs this time around.

“Trend growth indicates that WPI food prices are more volatile than CPI food and the later does not jump in the same magnitude. This is also substantiated by a breakdown of the correlation between wholesale (mandi) vegetable prices and retail vegetable prices particularly from August 2018,” Ghosh wrote in his report.

Madan Sabnavis, chief economist at CARE ratings also does not expect retail food prices to rise as sharply as wholesale prices.

“The difference in the composition of the food basket and the difference in weightage has increasingly led to divergence between the WPI and CPI indices,” Sabnavis said. “Unless out of chance, it is no longer expected for the WPI food inflation to converge with CPI food inflation,” said Sabnavis.