WPI Inflation at 12.54% raises fresh input cost worries

Wholesale Price Index or WPI inflation assigns a much larger weightage to manufactured products, unlike CPI inflation which assigns more weightage to food inflation.

Nov 18, 2021 08:11 IST India Infoline News Service

One of the popular ways of looking at inflation in India is the consumer inflation or the CPI inflation. That is the practice across the world. However, in the last few months a new phenomenon has been seen. The second quarter ended Sep-21 saw a steep rise in the input costs across most sectors. This impacted the growth in operating profits and net profits during the quarter.

How do we measure the input cost trends? Obviously, you cannot consider CPI inflation because it looks at prices from the consumer point of view. The answer would be to look at the producer inflation, which is best represented by WPI inflation. Wholesale Price Index or WPI inflation assigns a much larger weightage to manufactured products, unlike CPI inflation which assigns more weightage to food inflation. Secondly, WPI looks at prices from the producer perspective and offers the best proxy for input cost inflation.

How has WPI inflation trended?

The chart below captures the trend of WPI inflation over the last one year.

Data Source: Office of the Economic Advisor

Clearly, since April 2021, the WPI inflation has been on a much higher trajectory altogether. Since April, WPI inflation has consistently stayed in double digits with the momentum showing a sharp positive move in Oct-21 compared to Sep-21. What caused this surge?

This surge in WPI inflation is not just an India phenomenon but rather a global phenomenon. It is all about supply chain bottlenecks. For example, demand for autos is picking up but there are just not enough microchips to manufacture cars. Another example is the power sector. The demand for power is growing but the supply of coal is just not sufficient. In short, post pandemic the demand has grown, but supply hasn’t.

The outcome is a sharp rise in prices. Look at any of the base metals on the London Metals exchange be it copper, aluminium, zinc or nickel. All are sharply higher. The international price of coal is up 4 times in the last 6 months due to an acute global shortage. Crude oil is above $80/bbl. This may be good news for the commodity producers but bad news for the user industries. That is what is reflected by the WPI inflation number.

Capturing components of WPI inflation (yoy)
Commodity Set Weight Oct-21 WPI Sep-21 WPI Aug-21 WPI
Primary Articles 0.2262 5.20% 4.10% 5.93%
Fuel & Power 0.1315 37.18% 24.81% 28.15%
Manufactured Products 0.6423 12.04% 11.41% 11.56%
WPI Inflation 1.0000 12.54% 10.66% 11.64%
Food Basket 0.2438 3.06% 1.14% 3.76%
Data Source: Office of the Economic Advisor

In the WPI inflation basket, manufactured products have the highest weightage of 64.23%. Primary articles include crops and other products like oil and ores mined from the earth. The food basket is a combined basket created by combining the food items from primary articles basket and the manufactured products basket.

Clearly, fuel and power have been the big drivers of wholesale inflation or producer inflation in Oct-21. Fuel and power price inflation at 37.18% is material not just because of its direct cost impact but also due to its indirect cost impact considering that it impacts all products and services due to strong externalities.

The overall WPI inflation generally gravitates towards manufactured products due to its high weightage. It clearly shows that the pressure of producer prices is quite high. That is also visible if you look at the number of companies in the Sep-21 quarter facing pressure due to higher raw material and input costs.

Viewing WPI momentum with sequential numbers

The regular WPI number is a yoy number and hence it is vulnerable to the base effect. A better gauge of momentum is the sequential month-on-month WPI inflation. Here are key takeaways from the month-on-month sequential perspective.
  • For Oct-21, primary articles saw wholesale inflation at 3.10%. The big boost to the sequential primary articles inflation came from oil and gas which was up 9.48%. Food articles were also up 5.05% on a sequential basis. However, the momentum was negative in the case of non-food articles and minerals.
  • Fuel and power inflation on a sequential basis stood elevated at 8.72%, driven by an 18.84% spike in electricity prices and 7.74% spike in mineral oils. However, monthly momentum of coal prices has abated with the government pushing for more supplies to bridge the demand supply gap.
  • Manufactured products inflation was more subdued at 0.82% on a sequential basis. However, statistically if you look at the price movement, then 18 out of the 22 products in the basket saw a spike in price on a sequential basis. Manufactured products that saw a spike were basic metals, chemicals, electrical equipment, rubber and textiles. However, motor vehicles saw tapering of prices sequentially.

On a sequential basis, the overall WPI inflation was up 2.28% indicating that producer price momentum is still quite strong. For, now the combined impact of oil and metals promises to exert pressure on input costs for some more time.

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