Inflationary pressures moderate but risks remain
1.13 Headline Wholesale Price Index (WPI) inflation has declined largely on account of transitory factors including a favourable base effect and seasonal decline in vegetable prices. The headline WPI inflation, which was above 9 per cent during April-November 2011, moderated to 6.9 per cent by end-March 2012, consistent with the Reserve Bank’s indicative projection of 7 per cent. The moderation was initially driven by softening of food prices and then by a decline in non-food manufactured products (core) inflation, which fell below 5 per cent for the first time in two years. However, headline inflation thereafter, inched up to 7.6 per cent in May 2012 driven mainly by food and fuel prices (Chart 1.9). Notably, the consumer price index (CPI) inflation (as measured by the new series, base year: 2010) increased sharply from 7.7 per cent in January, 2012 to 10.4 per cent in April, 2012.
1.14 Notwithstanding the recent moderation in global crude oil prices and domestic price pressures in manufactured products, upside risks to inflation remain. The likely trends in global crude oil prices, going ahead, remain uncertain. Moreover, the impact of the lagged pass-through of rupee depreciation, suppressed inflation in energy and fertilisers and possible fiscal slippage continue to pose a significant threat. While moderation in global commodity prices could aid in checking inflationary trends in the coming months, this could at least partially be offset by the depreciation of the rupee. Inflation risks are likely to remain high, given the persistence of overall inflation, even in the face of significant growth slowdown which points to serious supply bottlenecks and sticky inflation expectations.