August 16, 2016 01:30 CDT

Actual Previous
Y/Y % change 3.55% 1.62%

After doubling in June, wholesale annual price inflation more than doubled again July, accelerating by 1.93 percentage points to an annual rate of 3.55 percent.

Though price increases were registered in most categories, the main contributor to the monthly rise was a big increase in the annual inflation rate for the heavily weighted components of food (11.82 percent after 8.18 percent) and primary articles (9.38 percent after 5.50 percent). Continued weakening of deflation in the energy sector also provided a lift, with the annual price decline shrinking from -3.62 percent to -1.00 percent, as did the most heavily weighted component, manufactured products (1.82 percent after 1.17 percent).

The sharp acceleration of pipeline inflation pressures over the last two months will surely make it very difficult for the RBI to decide to cut key rates as early as the next MPC meeting in October, especially given that consumer prices, up 6.07 percent on the year in July, are already at the upper limit of the RBI inflation target (4 percent +/- 2 percent). But restraint based on inflation targets could be a thing of the past with RBI Governor Raghuram Rajan retiring, and with interest rates, come October, set by a new 6-member Monetary Policy Committee that is expected to be more accommodative.

The Wholesale Price Index (WPI) covers primary articles, manufactured products and fuel and power. The data are not seasonally adjusted and the main focus in on the annual change in the index. This can be seen as an indicator of pipeline price pressures and is a loose leading indicator of consumer price inflation as targeted by the RBI.

The Wholesale Price Index is closely followed as an indicator of inflation by the Reserve Bank of India, as well as many Indian corporations and banks.

Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the WPI influence the markets - and your investments.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the WPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.