WPI Inflation at 14.23% on fuel spike and supply chain constraints

While the YoY inflation captures the broad trend of wholesale inflation, it is the sequential month-on-month inflation that will rally capture the momentum. Here is how the short term momentum has panned out in November 2021.

December 15, 2021 11:48 IST | India Infoline News Service
Between Oct-21 and Nov-21, the wholesale inflation spiked by 169 bps to 14.23%. One can argue that the impact of the tax cuts on oil are not fully factored in, but despite that, the rise in WPI inflation is a source of worry. The second quarter ended Sep-21 saw a steep rise in the input costs across most sectors. This input cost spike, caused by supply chain constraints, is best captured by the trend of WPI inflation.

The reason the Wholesale Price Index or WPI inflation is a better indicator of input costs is that it assigns a higher weightage of 64.23% to manufactured products, unlike CPI inflation which is dominated by the food basket. Secondly, WPI looks at prices from the producer perspective or the factory gate rather than from the consumer perspective.

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 consistently in double digits. The 14.23% WPI inflation in Nov-21 is the highest level so far this year, beating the 13.11% inflation recorded in May-21. What caused this surge?

From metals to automobiles to cement, supply chain constraints are pushing up costs everywhere. In the case of metals, the supply of ores and minerals is unable to keep pace with growing demand. In the case of aluminium and cement, that are power intensive, the spike in power costs has been constraining production. Auto companies have seen 20% fall in sales and output due to non-availability microchips, which make cars smarter. The slowdown in demand from autos and construction sectors has slowed the output of steel. The problem is almost rampant.

The trend of rising WPI inflation is also underlined by the inflation revisions. If you look at WPI inflation for the months of July 2021 and September 2021, the revisions have been higher in both the cases. For example, the final WPI inflation estimate for Jul-21 has been upped from 11.16% to 11.57%. The WPI inflation for Sep-21 has been upped from 10.66% to 11.80%. This opens up the possibility of upticks in WPI inflation in Oct-21 and Nov-21 too.

Capturing components of WPI inflation (yoy)

Commodity Set Weight Nov-21 WPI Oct-21 WPI Sep-21 WPI
Primary Articles 0.2262 10.34% 5.20% 5.98%
Fuel & Power 0.1315 39.81% 37.18% 29.49%
Manufactured Products 0.6423 11.92% 12.04% 11.57%
WPI Inflation 1.0000 14.23% 12.54% 11.80%
Food Basket 0.2438 6.70% 3.06% 2.59%
Data Source: Office of the Economic Advisor

In the WPI basket, manufactured products have top 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, which is why it is shown as a separate item.

Clearly, fuel and power have been the big drivers of wholesale inflation or producer inflation in Nov-21. Fuel and power price inflation at 39.81% is material because of its direct and indirect cost impact due to strong externalities. Bulk of the pressure on WPI inflation has come from the primary articles (mainly crude oil) and from products like LPG and diesel.

The overall WPI inflation normally tends to gravitate towards manufactured products due to its high weightage. However, in November, it is the fuel basket that had the biggest impact on the WPI inflation, which explains why the November WPI number is much higher than the manufacturing inflation.

WPI momentum with sequential numbers is steep

While the YOY inflation captures the broad trend of wholesale inflation, it is the sequential month-on-month inflation that will rally capture the momentum. Here is how the short term momentum has panned out in November 2021.
  • For Nov-21, primary articles saw wholesale inflation at 5.57%. The big boost to the sequential primary articles inflation came from crude oil and natural gas which was up 12.24%. within the primary basket, food articles were up 5.81% on a sequential basis. Momentum was positive in the primary basket minerals and non-food items too.
  • Fuel and power inflation on a sequential basis for Nov-21 was relatively subdued at 5.61% compared to 8.72% in Oct-21. This was an outcome of the excise and VAT cuts on petrol and diesel. The inflation in electricity costs were flat, unlike last month, with the coal shortage being addressed for now. Even coal inflation was flat for Nov-21.
  • Manufactured products inflation was more subdued at 0.89% on a sequential basis. However, statistically if you look at the price movement, then 16 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, paper products and textiles. However, electrical equipment, leather and tobacco products saw tapering of prices on a M-O-M basis.

On a sequential basis, the overall WPI inflation was up 2.73% (45 bps higher than last month), indicating that producer price momentum is still quite strong. In November, it is the primary sector, especially the extraction segment, that put all the pressure on WPI. For now, the supply chain driven producer inflation does not appear to be going away in a hurry.

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