From inputs to retail, a monster rages through: As supply-side inflation pressures build, the implications for monetary policy

Over the past few weeks, India’s inflation story has been shifting from producers to consumers, drivenmore by cost-push than demand-pull forces.The trend, duly tracked in our Quickonomics series, started with a divergence in April, when inflationbased on the Wholesale Price Index (WPI) surged to 8.3% from 3.9% in March, while Consumer PriceIndex (CPI) inflation remained relatively benign at 3.5%.This gap signals building cost pressures.Also Read: RBI MPC- A problem Shaktikanta Das had contained may be returning to haunt Sanjay Malhotra & CoTo be sure, such divergence is not uncommon—typically, WPI inflation responds to global commodityprice movements, while CPI inflation reflects consumer prices, including for services.The current gap, however, stands out for its speed and the drivers, which we explored in theQuickonomics piece, ‘Price parts path – again’.The global commodity shock, triggered by the ongoing West Asia conflict, has caused the spike in WPIinflation, driving up prices of key inputs, particularly energy. Coupled with already elevated prices of othercritical manufacturing inputs, this is creating widespread cost pressures across industries.Crisil’s input-output ratio surged to 1.02 in April, crossing the critical threshold of 1.0 for the first time in 44months. A ratio of above 1.0 indicates that input costs are rising faster than output prices, puttingpressure on profit margins and increasing the likelihood of price transmission into retail prices.The data reveals the scale of the shock. Based on the clustered WPI categories, prices of crude-relatedproducts jumped 49% on-year in April, while aluminium and copper prices increased over 20% and 17%,respectively. Prices of gas-related inputs also rose 19%.Underlying pressures were already building, with metals such as copper and aluminium recording priceincreases above their long-term averages in the previous fiscal. Our Quickonomics piece, ‘Input costs onfire’, outlined this trend.The Indian Institute of Ahmedabad’s ‘Business Inflation Expectations Survey (BIES) 1 ’ in April indicatedthat firms expect further cost increases. For April (before the retail fuel price hike), the survey found thatthe percentage of firms that perceived costs were ‘up significantly’ had increased to 46%, compared withonly 35% before the West Asia conflict had begun.The persistent rise in input costs, the resultant increase in WPI inflation and firms’ perception of elevatedcosts provide clear signals about the inflation trajectory for the rest of this fiscal.The second leg of the inflation story is unfolding as retail fuel prices increase.Since mid-May, retail petrol and diesel prices have been increased on four occasions, cumulatively by Rs7.5 per litre, and may rise further if crude oil prices remain elevated. Brent crude averaged $112/barrelduring April and May.This has significant implications for inflation, both directly and indirectly. Directly, the retail fuel price hikescould add 36 basis points to CPI inflation. However, the larger and more widespread impact is likely to beindirect, through transportation costs—a critical component of India’s supply chain.Fuel accounts for 42% 2 of road transport costs, and with road transport handling 71% 3 of the country’sfreight, a sustained increase in fuel prices can ripple across the economy, raising the cost of movinggoods and, eventually, consumers prices.Certain sectors are more vulnerable to this transmission due to their higher transport-cost intensity.Our latest Quickonomics piece, ‘From pumps to prices’, examines the supply-use tables to identifysectors with the higher transport-cost intensity.Food items such as dairy products, tea, coffee, fruits, pulses, spices, eggs and meat have relatively hightransport costs, making them more sensitive to rising logistics expenses.Additionally, core CPI inflation categories, including clothing, electronics, and housing-related materialssuch as cement and ceramics will be impacted.With steady demand conditions in the Indian economy, producers are likely to pass on increased costs toconsumers to protect profit margins, either through price hikes or ‘shrinkflation’—reducing product sizeswhile keeping prices unchanged.Looking ahead, the inflation trajectory will depend on several variables, including global crude oil prices,domestic fuel price adjustments, the monsoon, and potential El Niño effects on agricultural output.For now, the direction appears clear, but there is a counterbalancing factor.The rationalisation of goods and services tax rates in 2025, which reduced tax rates on mass-consumption items, will provide a partial cushion against rising inflation.Thus, while CPI inflation, currently below the Reserve Bank of India’s (RBI) target of 4%, is likely to rise, itshould remain within the upper tolerance limit of 6%.We expect the RBI’s Monetary Policy Committee to look through these supply-side impressions on CPIinflation while monitoring risks to broader inflation expectations.The author is Principal Economist, Crisil Limited. Views are personal.(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)