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February 2023 WPI inflation falls to 25-month low of 3.85%

  • 15 Mar , 2023
  • 11:25 AM
  • When the Office of the Economic Advisor announced the February 2023 wholesale price inflation (WPI) on 14th March, it marked the 9th consecutive month of lower wholesale inflation.

From the peak of 16.63% in April 2022, WPI inflation has fallen 1278 basis points to 3.85% in just 9 months. Each month has been progressively lower. The impact of the rate hike of 250 bps has been evident on WPI inflation; not so much on CPI inflation. Against the 1278 bps fall in WPI inflation, retail inflation is down just 135 basis points from the peak. Retail inflation typically reacts with a lag, to shifts in interest rates while WPI is normally the lead indicator. 

MonthWPI Inflation (%)CPI Inflation (%)

Jan-22

13.68%

6.01%

Feb-22

13.43%

6.07%

Mar-22

14.63%

6.95%

Apr-22

15.38%

7.79%

May-22

16.63%

7.04%

Jun-22

16.23%

7.01%

Jul-22

14.07%

6.71%

Aug-22

12.48%

7.00%

Sep-22

10.55%

7.41%

Oct-22

8.67%

6.77%

Nov-22

5.85%

5.88%

Dec-22

4.95%

5.72%

Jan-23

4.73%

6.52%

Feb-23

3.85%

6.44%

Data Source: Office of the Economic Advisor (peak levels are shaded)

WPI inflation has generally been more sensitive and hence the impact of any rate hike is immediately visible in WPI inflation. The impact eventually gets transmitted to CPI inflation with a certain time lag, through the impact on consumer spending. 

WPI inflation trend in last 3 months

Overall WPI inflation is divided into primary articles (mining and crops), manufactured products and fuel & power. Manufactured products have the highest weightage of 64.23% in the WPI basket followed by primary articles at 22.62% and fuel & power at 13.15%. The sharp fall in manufacturing inflation has been a key driver for lower WPI inflation. Food basket has a weight of 24.38%, but this is partly carved out of primary articles (food crops) and partially manufactured products (food products).

Commodity Set

Weight

Feb-23 WPI

Jan-23 WPI

Dec-22 WPI

Primary Articles0.22623.28%3.88%2.67%
Fuel & Power0.131514.82%15.15%18.09%
Manufactured Products0.64231.94%2.99%3.37%
WPI Inflation1.00003.85%4.73%5.02%
Food Basket0.24382.76%2.95%0.89%

Data Source: Office of the Economic Advisor

The WPI inflation at 3.85% in February 2023 is the lowest level of WPI inflation seen in the last 25 months; and largely a reaction to persistent RBI rate hikes. One key risk to WPI inflation is that higher cost of funds has imposed a steeper financial cost on companies. This could impact cost of funding for Indian companies and impact their solvency. The sharp fall in WPI inflation has been progressively driven by manufacturing inflation and fuel inflation. Otherwise, food inflation is higher compared to December 2022.

Which products moved WPI inflation in February 2023?

The sharp fall in WPI inflation was across manufactured products and fuel; but WPI inflation of food products and primary articles are higher compared to December 2022. Manufacturing inflation fell from 3.37% in December 2022 to 2.99% in January 2023 and 1.94% in February 2023. With a weightage of 64.2% in WPI basket, manufacturing had an oversized impact in pulling down WPI inflation. Energy inflation tapered amidst a global commodity correction to 14.82%, but food inflation is showing the pressure on the Rabi crop due to a prolonged heat wave across India. 

Commodity

WPI Inflation

Commodity

WPI Inflation

HSD Oil

24.61%

Onions

-40.14%

Wheat

18.54%

Vegetables

-21.53%

Petrol

15.24%

Potatoes

-14.30%

Natural Gas

14.47%

Vegetable & Animal Oils

-13.99%

Cereals

13.95%

Minerals

-10.62%

Milk

10.33%

Crude Petroleum

-10.22%

Paddy

8.60%

Oil Seeds

-7.38%

Cement

8.18%

LPG

-7.12%

Fruits 

7.20%

Textiles

-3.51%

Mineral Products

6.79%

Basic Metals

-0.20%

Data Source: Office of the Economic Advisor

In terms of specific products, highest producer inflation in February 2023 was in HSD at 24.61% followed by Wheat at 18.54%, Petrol at 15.24%, Natural Gas at 14.47%, cereals 13.95%, Milk at 10.33% and Paddy at 8.60%. Let us now turn to the negative triggers for WPI inflation in February 2023. For instance, Onions at -40.14%, Vegetables at -21.53%, Potatoes at -14.3%, Vegetable Oils at -13.99% and Minerals at -10.62% kept WPI inflation in check. 

What does the high frequency WPI inflation tell us?

While WPI inflation is generally presented YOY, the DIPP also presents high frequency MOM picture; like the Bureau of Labour Statistics (BLS) in the US does. High frequency data provides critical insights on short term momentum of the inflation number. In a volatile macro environment, the very short term headwinds and tailwinds are best captured by the MOM data on WPI inflation. Here are some of the principal takeaways.

  • For February 2023, MOM WPI inflation expanded by 20 bps. In 3 out of last 6 months, the MOM WPI inflation has been negative. This could indicate WPI inflation close to bottoming out.

     
  • Is there MOM pressure right now? For February 2023, sequential WPI inflation is 1.93% higher for fuel & power, while primary articles are down -0.57% MOM and manufactured products up 0.21% MOM. It is about the low base effect in January 2023.

MOM numbers are a kind of 2-way street. They capture short-term trends better but they also tend to be vulnerable to short term base effects. However, it is a good measure to ratify the yoy WPI inflation trend and capture any short trends in the data.

RBI will be watching the Fed closely in its March meet

Will RBI rely more on WPI inflation than on CPI inflation and shift its monetary stance? That looks unlikely, if you go by the language of the RBI in the February policy meet and the minutes of the MPC. RBI had underlined in the minutes that it would still prefer to focus on controlling inflation rather than managing growth triggers. RBI will prefer to see CPI inflation coming closer to 4% before envisaging any change in stance. CPI inflation has now stayed above the 6% outer tolerance limit for the second month in a row in February 2023.

Over the last 2 MPC meetings, two members viz. Jayanth Varma and Ashima Goyal have openly called for a pause on rate hikes and a shift in focus to growth. In February 2023 MPC meet, they voted against the rate hike and against the withdrawal of the accommodative policy approach. However, now the SVB Financial crisis could be the joker in the pack. Here is what RBI may focus on.

  • In the March 2023 quarter, cost of funding is already up 101 bps compared to the Dec-22 quarter. That is not good news. RBI clearly would be aware that unless that pressure is reduced, the benefits of higher NIMs for banks cannot last for too long.

     
  • RBI may be inclined to focus more on core CPI inflation, which remains sticky at 6.1%. RBI is now looking at bringing down the core inflation to more manageable levels, before attempting any shift in stance.

     
  • One factor that may impact the April stance of the RBI is how the Fed responds to the SVB Financial crisis when it meets on 22nd March. Till the SVB Financial crisis broke out, the debate in the Fed was between 25 bps and 50 bps. With the SVB Financial being, partially, a victim of hawkish Fed policy, the Fed may do a rethink in its March meet. That will also influence how the RBI reacts to inflation and to the financial sector crisis.

The RBI has a tightrope to contend. It is caught in a dilemma between falling wholesale inflation, sticky consumer inflation and growth hitting a wall of worry. In between, the SVB Financial crisis and its spill over effect on India added a new dimension. The April 2023 policy of the RBI could set the tone for the year.

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May 2022 WPI inflation surges to 31-year high of 15.88%

  • India Infoline News Service
  • 15 Jun , 2022
  • 10:45 AM
In the period between February 2022 and April 2022 wholesale price inflation (WPI) had surged 197 bps from 13.11% to 15.08%. However, that was hardly the end as the WPI inflation in May 2022 spiked another 80 bps to 15.88%. There are two reasons to worry here. Firstly, the May 2022 inflation at 15.88% is on a base of 13.11% WPI inflation in May 2021, so the cumulative impact is bigger. Secondly, not only is WPI inflation well above estimates, it is the highest level seen since the crisis of 1991, almost 31 years back. That was when India had pledged gold with the Bank of England.

Before we go further, let us spend a moment on understanding the practical importance of WPI inflation. WPI inflation assigns weightage of 64.23% to manufactured products, which makes it a better measure of producer costs. In a sense, this also makes WPI inflation a solid lead indicator of margin pressures on Indian corporates due to input cost spikes. It was a combination of food and fuel price spike, but the message is that inflation in India is not about consumption but about supply chain bottlenecks.

The rise and rise of WPI inflation in last 1 year

The month of May 2022 marked the 14th consecutive month double-digit WPI inflation. More importantly, this is also a 31-year high for WPI inflation. Higher WPI inflation in April 2022 was catalysed by factors like the Ukraine war, sanctions on Russia, lockdowns in China to address resurgence of COVID, central bank hawkishness, monetary tightness etc.



Data Source: Office of the Economic Advisor

One concern is upward revisions to previous WPI inflation estimates which also opens up the current WPI estimates for further upgrades. The February 2022 WPI inflation estimates have been scaled up by 32 bps from 13.11% to 13.43%. At the same time, the March 2022 WPI inflation estimates have also been raised by 8 basis points from 14.55% to 14.63%.

On a yoy basis, manufacturing inflation in May 2022 tapered lower on a sequential basis from 10.85% to 10.11%. Since manufacturing has a weightage of 64.23% in the WPI basket, this will keep overall WPI inflation in check, although food and fuel continue to be major risks. If you look at the overall WPI inflation basket; other than onions and pulses, all the other products in the WPI inflation basket, saw inflation growth over May 2021.

The broad narrative still remains the same. It is once again a case of supply not keeping pace with demand and Ukraine and China just adding to the supply side bottlenecks. The 31-year high WPI inflation can be explained by a surge in prices of vegetables, crude oil, minerals, LPG, base metals, finished steel, cereals, wheat, potatoes, oils and fats.

How WPI components panned out in last 3 months

Commodity Set Weight May-22 WPI Apr-22 WPI Mar-22 WPI
Primary Articles 0.2262 19.71% 15.45% 15.94%
Fuel & Power 0.1315 40.62% 38.66% 31.78%
Manufactured Products 0.6423 10.11% 10.85% 11.26%
WPI Inflation 1.0000 15.88% 15.08% 14.63%
Food Basket 0.2438 10.89% 8.88% 9.29%
Data Source: Office of the Economic Advisor

There has been a sharp spike in primary inflation which includes agricultural production and minerals production. Primary Articles inflation has surged from 15.45% in April 2022 to 19.71% in May 2022. This is largely on account of supply chain bottlenecks. This is an important trigger that is keeping the overall WPI inflation high.

For May 2022, fuel inflation rallied from 38.66% in April 2022 to 40.62% in May 2022. The government has not been raising prices of petrol and diesel after a spate of price hikes post March. Brent Crude at $122/bbl is the real pain point, although the cheaper imports of crude from Russia should help the Indian cause.

The good news is that manufacturing inflation in May 2022 tapered from 10.85% to 10.11% on a sequential basis. Supply was already struggling to sync with demand and the Ukraine war has worsened it. Manufacturers are passing on higher costs to the end customers wherever possible and that is leading to tepid demand for many consumer products. The third logical implication is that the weak demand is hitting capacity utilization leading to under-absorption of fixed costs.

How did high frequency WPI numbers pan out?

Shifts in WPI inflation are extremely input cost sensitive for the manufacturing sector. Hence, the high frequency MOM data is also very critical.
  • For May 2022, overall MOM WPI inflation tapered from  2.01% to 1.38%. The MOM WPI inflation had spiked sharply between December 2021 and March 2022, but after touching a high of 2.48% in March, the number has been tapering.
  • The real pressure is coming from the primary basket and the trend is clear if you look at the MOM data. In February 2022, the MOM primary articles inflation was zero and has since spiked to a high of 2.8%. It clearly shows that primary articles like, select agri products, oil, gas and minerals were exerting pressure.
  • May 2022 again saw softening of manufacturing inflation on a MOM basis. Between March 2022 and May 2022, the manufacturing MOM inflation has tapered from 2.45% to 0.56% as the duty cuts helped keep manufacturing inflation in check.
  • Even power and fuel inflation peaked at 4.93% sequential WPI inflation in April 2022 but since tapered to 2.25%.
There are some positive sequential tidings from fuel and manufactured products but as long as supply chain constraints hit the primary articles, the multiplier effect is a reality.

RBI worried about consumer inflation; more worried about WPI

In the month of May 2022, the consumer inflation tapered from 7.79% to 7.04%. However, during this period, WPI inflation spiked from 15.08% to 15.88%. RBI has set the ball rolling by hiking repo rates by 40 bps in May 2022 and 50 bps in June 2022. However, that will address CPI inflation but may not do much for WPI inflation. That would require more of international tapering of prices and better supply chain management here.

The Q4 results for India Inc are a stark reminder that operating margin pressures are a reality due to input cost spikes. That is reflected in WPI inflation. Q4 also saw tremendous pressure on working capital cycles and a spike in funds locked in trade receivables and inventories. RBI will do its best to tighten the market by raising rates, tighten liquidity and making thing uncomfortable. These are the only factors that RBI can influence for now!

WPI inflation surges to 17-year high of 15.08% in April 2022

  • India Infoline News Service
  • 17 May , 2022
  • 6:12 PM
Between February 2022 and March 2022 wholesale price inflation (WPI) had surged 144 bps from 13.11% to 14.55%. However, in April 2022, the WPI inflation surged by another 53 bps to 15.08%. There are two things of note here. Firstly, the April 2022 inflation at 15.08% is on a base of 10.74% WPI inflation in April 2021, so the relative impact is much higher. Secondly, the Reuters consensus estimate for WPI inflation for April 2022 had pegged the figure at 14.48%. The actual number is a good 60 bps above the Reuters estimate.

What exactly is the practical application of WPI inflation?

WPI inflation assigns a high weightage of 64.23% to manufactured products. This makes WPI inflation a sound lead indicator of margin pressures on Indian corporates due to input cost spikes. What is actually disconcerting is that the WPI inflation for April 2022 is at a 17-year high; with these kind of inflation numbers last seen in April 2005. Once again, it was a combination of food and fuel prices that resulted in a surge in WPI inflation in April 2022.

How did WPI inflation trend in the last one year?

April 2022 marked the 13th consecutive month WPI inflation stayed in double digits. But all that pales in comparison to the fact that this is a 17-year high on WPI inflation. Higher WPI inflation in April 2022 was catalysed by the Ukraine war, which resulted in a sharp rally in a plethora of base commodities and the supply chain constraints imposed by China lockdown.

One concern is upward revisions to WPI inflation. February 2022 WPI inflation was originally estimated at 13.11% but now raised 32 bps to 13.43%. That is a lot of data being missed out and raises the possibility of March and April inflation also being revised higher.

On a yoy basis, manufacturing inflation was higher at 10.85%. Since manufacturing has 64.23% weight in the WPI basket, this will keep overall WPI inflation in double digits. If you look at the overall WPI inflation basket; other than onions and pulses, all the other products in the WPI inflation basket, have seen positive growth in prices over April 2021.

It was again a case of supply not keeping pace with demand and Ukraine and China are worsening the story. The 17-year high rate of WPI inflation can be largely explained by a surge in prices of mineral oils, basic metals, crude petroleum, natural gas, food products, chemicals and chemical products.

How do the various components of WPI look yoy?
Commodity Set Weight Apr-22 WPI Mar-22 WPI Feb-22 WPI
Primary Articles 0.2262 15.45% 15.54% 13.87%
Fuel & Power 0.1315 38.66% 34.52% 30.84%
Manufactured Products 0.6423 10.85% 10.71% 10.24%
WPI Inflation 1.0000 15.08% 14.55% 13.43%
Food Basket 0.2438 8.88% 8.71% 8.67%

Data Source: Office of the Economic Advisor

There is an interesting trend in primary articles inflation. Food inflation is up to 8.88% but overall primary inflation (crops are a part of primary inflation) is up sharply to 15.45%. While most agri-related inputs are under control, mined inputs like minerals, crude and ores are experiencing rampant inflation.

For April 2022, fuel inflation continues to spiral out of control at 38.66%. Since March 2022, the government has been consistently raising the price of petrol and diesel, so that is actually translating into upstream and downstream inflation. Globally Brent Crude is back at $114/bbl and that makes most sectors vulnerable to the crude price impact.

Manufacturing inflation in April 2022 at 10.85% yoy reflects further pressure on input costs. Supply was already struggling to sync with demand and the Ukraine war has worsened it. Manufacturers are passing on higher costs to the end customers and the impact is already being felt in tepid demand for most consumer goods. The third logical implication is that this the weak demand was hitting capacity utilization leading to under-absorption of fixed costs.

In WPI inflation, it is the MOM story that is truly insightful

Since the shifts in WPI inflation are extremely input cost sensitive for the manufacturing sector, it is the high frequency MOM data that is of a lot more interest.
  • For April 2022, overall MOM WPI inflation tapered to 2.08%, with minimal incremental price momentum. The MOM WPI inflation has moved up from 0.35% in January to 1.04% in February and a steep 2.41% in March; but tapered to 2.08% in April.
  • In Mar-22, there was a substantial contribution made to WPI basket by the primary basket (especially oil, gas and minerals). From 1.67% primary articles inflation in March 2022, it has spiked to 2.70% in April 2022.
  • Mar-22 saw softening of manufacturing inflation. It progressively moved from 0.51% in January to 1.24% in February and 1.94% in March. However, the MOM manufacturing inflation has softened to 1.69% in April 2022.
  • Finally, we come to fuel & power inflation. Sequential fuel inflation spiked from 1.12% in January to 2.22% in February and a much steeper 6.22% in March. However, the MOM fuel and power has softened to 2.79% in April 2022, albeit still elevated.
WPI at 7-year high means RBI accommodation is done and dusted

If consumer inflation at 7.79% was the first hint, it has almost been ratified by the WPI inflation at a 17-year high of 15.08% in April 2022. The RBI has set the ball rolling by hiking repo rates by 40 bps in May and CRR by 50 bps. The spike has been intense across the 3 baskets of fuel, primary products and manufactured products. Supply chain constraints are pinching but the bigger risk is that the rampant imported inflation is also weakening the rupee. For the RBI, there is just one solution to the problem; and that is rate hikes.

The Q4 results for India Inc are revealing in more ways than one. Now it is not just about the operating margin pressures due to rising input costs. It is about the pressure on working capital cycles and a big spike in funds locked in trade receivables and inventories. A major chunk of the input cost spike has been passed on to the end consumer but that is going to be increasingly difficult in the days ahead. The latest WPI inflation number has left the RBI will limited choice. RBI needs to raise rates, tighten liquidity and make thing uncomfortable. There is really no other option now!

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  • 15 June, 2022 |
  • 9:17 AM

WPI inflation in May 2022 spiked another 80 bps to 15.88%.

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