Why Inflation Is Rising in India

Context

Verified Latest Data

• WPI inflation: 9.87% (June) vs 9.68% (May) — a record under the new 2022-23 base year series.
• Group-wise: Primary Articles 7.0% | Fuel & Power 27.41% (eased from 30.33% in May) | Manufactured Products 7.48%.
• WPI Food Index: 6.14% (up from 4.49%).
• Retail inflation (CPI) was much lower at 4.38% in June — note the wide CPI-WPI divergence.
• Key drivers: mineral oils/petroleum products, food articles, basic metals, chemicals.

The Core Argument

Two Kinds of Prices (Michal Kalecki)

• Primary commodity prices = demand-determined: Supply is virtually fixed (vertical supply curve). A supply shock (e.g. bad monsoon) shifts supply left → prices rise. This is demand-pull in effect.
• Industrial/manufactured prices = cost-determined: Factories run below capacity, so higher demand raises output, not price (flat supply curve). Prices instead reflect cost of production + profit markup. This is cost-push.

What Happened in India

• Manufactured inflation: Not from demand. Wage costs don’t push prices up (Indian workers are largely price-takers with weak bargaining power). Instead, material costs — especially oil — drive it. Fuel & power prices track manufactured inflation almost one-to-one.
• Food inflation: Driven by supply shock — an inadequate monsoon linked to the El Niño effect. Droughts have historically coincided with food-inflation spikes (drought is a sufficient but not necessary condition).

Key Concepts

• WPI vs CPI: WPI measures wholesale/producer-level price change (no services); CPI measures retail prices paid by consumers (includes services) — RBI targets CPI.
• Cost-Push Inflation: Inflation from rising input costs (oil, raw materials, wages) rather than excess demand.
• Demand-Pull Inflation: Inflation when aggregate demand outstrips supply.
• Countercyclical Fiscal Policy: Adjusting taxes/spending against the economic cycle — e.g. cutting fuel duties when prices spike.
• PPI (Producer Price Index): Measures price change from the producer’s perspective; India released it alongside WPI (9.57% in June).

Practice MCQs

Q1. With reference to the Wholesale Price Index (WPI) in India, consider the following statements:

1. The WPI is released by the Ministry of Commerce and Industry.
2. Unlike the CPI, the WPI does not include services.
3. The Reserve Bank of India’s inflation-targeting framework is based on the WPI.
4. The current WPI series uses 2022-23 as the base year.

How many of the above statements are correct? (a) Only one (b) Only two (c) Only three (d) All four (e) None

Q2. With reference to the Kaleckian analysis of inflation described in the article, consider the following statements:

1. Primary commodity prices are treated as demand-determined, with a virtually fixed (vertical) supply.
2. Manufactured goods prices are treated as cost-determined, reflecting a markup over production costs.
3. A key driver of India’s recent manufactured-goods inflation is the rise in oil/fuel and power costs.
4. The authors attribute the manufactured inflation mainly to rising wage costs of Indian workers.

How many of the above statements are correct? (a) Only one (b) Only two (c) Only three (d) All four (e) None

Answer Key

1. (c) — Statement 3 wrong: RBI targets CPI, not WPI.
2. (c) — Statement 4 wrong: material/oil costs drive manufactured inflation, not wages.