The ability of manufacturers to pass on the rise in costs is aided by a concentration of industrial output among large producers, since small enterprise fared worse during the Covid pandemic.
Wholesale inflation averaged nearly 13% in 2021-22, more than double the rate of retail inflation. This happens to be the highest annual number in three decades. Inflation based on the wholesale price index (WPI) spiked to 14.55% in March, the second-highest level since 2003-04, as crude petroleum shot up by 83.56%. Manufacturing, which makes up for the bulk of the index, returned to an inflation rate of above 10% after a two-month hiatus. And, core inflation, excluding volatile food and fuel prices, accelerated from 10% in February to 10.9% in March. Food inflation has moderated from the previous month to 8.06%. However, this has been more than offset by 34.52% fuel inflation during March.
The ability of manufacturers to pass on the rise in costs is aided by a concentration of industrial output among large producers, since small enterprise fared worse during the Covid pandemic. Large enterprise is protecting its margins, and this is showing up separately in buoyant tax collection. Small and medium enterprises (SMEs) play a key role in converging wholesale inflation to the retail rate. But with their loss of agency, the trend could well be reversing. The longer it takes for small business to revive, the prospects of the consumer price index (CPI) being pulled up by an elevated WPI remain high.
The WPI is indicating inflation has become generalised. The trajectory of wholesale inflation is unlikely to reverse as long as expensive energy pushes up input, transportation and logistics costs. Supply chain disruptions and conflict are expected to keep commodity and fuel prices elevated, no thanks to the war in Ukraine. Additional pressure could arise if food inflation works its way into wage hikes as the economy unlocks post-pandemic. The markets are factoring in a hard landing on interest rates before consumption and production at the base of the pyramid recover fully. The knock-on effect on growth could eventually subdue producers’ pricing power.