Sharp decline in fuel and power prices and moderate reduction in manufactured products dragged the rate of producers’ inflation to nearly one per cent in the month of July. This rate of inflation is known as the Wholesale Price Index (WPI).

According to data released on Wednesday, the annual rate of inflation, based on monthly WPI, stood at 1.08 per cent for the month of July, as compared to 2.02 per cent in June, and 5.27 per cent during the corresponding month last year. The build-up inflation rate in the financial year so far was 1.08 per cent, compared to a build up rate of 3.1 per cent in the corresponding period of the previous year.

Earlier, data released on Tuesday, showed rate of retail inflation based on consumer price index (CPI) slipped to 3.15 per cent in July, as against 3.18 per cent in June.

More rate cuts likely?

With both the inflation rates falling, there is strong possibility that RBI Governor-led Monetary Policy Committee (MPC) will go for another rate in October, when it will meet for next round of bi-monthly monetary policy review. It has already reduced the policy rate cut by 110 basis points (100 basis points mean one percentage point) in four successive reviews.

According to experts, weak commodity prices, a mild appreciation of the rupee, as well as a lack of pricing power contributed to the sharp and fairly broad-based fall in the core inflation to a 33 month low 0.2 per cent in July.

The fall in the core WPI inflation contrasts with the up-stick in the core CPI inflation in July, led by the different composition of these two indices. Around half of the core CPI is made up of services, the demand for which is likely to be sticky in a downturn and prices relatively inelastic to changes in commodity prices. Therefore, “we expect the divergence between the core WPI and core CPI inflation to persist in the coming months,” says Aditi Nayar, Principal Economist with ICRA, an economic research firm.

The WPI inflation is expected to remain muted in the near term, reflecting the continued softness in commodity prices, although a weaker currency may arrest the correction in the landed price of imports. Moreover, “available trends suggest that the fall in wholesale food inflation in July 2019 may prove to be temporary. Additionally, the rise in gold prices would push up inflation related to other manufacturing,” she said.