Divergence in WPI and CPI posing new challenges – UPSC GS3

Inflation in many big countries.

In India, WPI is in double digits while CPI is low.

U.S: Some experts think that the current inflationary pressure is a short-term episode triggered by supply-chain disruptions. While others see it as the result of the large spending under US President Joe Biden’s American Rescue Plan. As a result of sustained inflation, Americans expect their financial situation to worsen in the near term, a level of pessimism not seen since the Great Recession of 2008-09.

Turkey: Turkey has an alarming annual inflation rate of 19.9%. Making matters worse, its president Recep Tayyip Erdogan believes the right response is to reduce interest rates. However, reducing interest rates will not be a good policy choice for now.

Brazil: Brazil has recently joined the list of countries with double-digit price growth. Inept policymaking by the government has created fears that the economy is on the verge of a technical recession.

India, especially, faces a tricky inflation problem. Retail inflation is elevated but not at the level seen in many other economies.

But wholesale price inflation, that increased sharply to 12.5% year-on-year in October, has reached its highest levels since the late 1990s. This poses an unusual policy challenge.

The wide divergence between wholesale and retail inflation is impacting the small manufacturers, the self-employed and workers.

Those who buy from the wholesale market and sell on the retail market are seeing a fall in their profits. They are cutting back production and this, in turn, is adversely affecting workers.

If this divergence is allowed to persist, growth will likely decline as small businesses, already under strain, reduce output and cut employment and possibly shut down.

But if the government tries to narrow the gap by letting retail inflation rise, consumers will be hit hard.

The only reasonable way out is for policymakers to tackle wholesale price inflation directly.

This will require a combination of fiscal and monetary measures, like reducing the high tax on fuel and slashing all non-essential spending while also supporting those hit hardest by the pandemic.