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WPI inflation spikes to 13.11% in Feb-22 on input cost pressures

Over the next 3 months, WPI inflation can see gradual tapering as the base moves sharply higher.

March 16, 2022 8:34 IST | India Infoline News Service
Between Jan-22 and Feb-22, the wholesale price inflation (WPI) was up by 15 bps from 12.96% to 13.11%. Reuters had estimated the WPI inflation to come down to 12.10% in Feb-22; instead it ended up at 13.11%. Over the next 3 months, WPI inflation can see gradual tapering as the base moves sharply higher. If you look on a sequential basis, the spike in WPI inflation in Feb-22 over Jan-22 was triggered by a sharp spike in fuel and manufacturing inflation. However, primary inflation has been neutral.

Wholesale Price Index or WPI inflation is a better indicator of input costs as it assigns a higher weightage of 64.23% to manufactured products. On the other hand, CPI inflation is dominated by the food basket. WPI looks at prices from the producer perspective or the factory gate rather than consumer prices. However, this makes WPI inflation vulnerable to the kind of input cost inflation that we are seeing of late.

Trend of WPI inflation over last one year?

Feb-22 marks the 11th consecutive month when WPI inflation stayed in double digits. That goes to show how much of producer inflation there is in the Indian economy. You can see it all over. Prices of crude, minerals, chemicals are all up sharply even as coal is trading at all-time highs. This was instrumental in spiking WPI inflation.

Data Source: Office of the Economic Advisor
One concern is that revisions to WPI inflation have been on the upper sides. For instance, Dec-21 WPI inflation was pegged at 12.54% in original estimate, 13.56% in the preliminary revised estimate and at 14.27% in the final revised estimate. That is a lot of inflation that is being missed out and raises the spectre of subsequent WPI inflation being revised higher.

On a yoy basis, it is gratifying to note that manufacturing inflation is stabilizing around the 10% mark, although it is still quite high in isolation. Remember, manufacturing has 64.23% weight in the WPI basket. If you look at the break-up of the manufacturing basket, the pressure is visible across 18 out of the 21 manufactured products. It is about supply failing to keep pace with demand. Under the umbrella of manufactured products, the biggest pressure is seen in products like paper, textiles, chemicals etc which are all key inputs.

How the WPI components trended on yoy basis

Commodity Set Weight Feb-22 WPI Jan-22 WPI Dec-21 WPI
Primary Articles 0.2262 13.39% 13.87% 13.78%
Fuel & Power 0.1315 31.50% 32.27% 38.08%
Manufactured Products 0.6423 9.84% 9.42% 10.71%
WPI Inflation 1.0000 13.11% 12.96% 14.27%
Food Basket 0.2438 8.47% 9.55% 9.37%
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 of food items from primary articles basket and the manufactured products basket, which is why it is shown as a separate item for clarity purpose.

For the month of Feb-22, most of the WPI inflation pressure came from the manufacturing basket. Fuel inflation was flat on a yoy basis, largely because the government has not reacted to the crude spike. Primary articles and even food products saw yoy inflation lower. However, manufacturing inflation spiked from 9.42% to 9.84% and this pressure is also evident in the operating margins of Indian companies over the last two quarters.

Manufacturing inflation increasing in Feb-22 is reflective of 3 underlying trends. Firstly, the supply is still struggling to keep pace with demand and supply chain constraints are creating most of the problems for manufacturing sector. Secondly, spike in input costs like crude oil, mineral oils, minerals and metals is translating into higher cost of production and a major chunk is being passed on to end customers. Lastly, demand is weak in most sectors so critical industries are still not operating at full capacity. That is constraining the capacity of manufacturing companies to absorb the fixed costs effectively through economies of scale.

Sequential WPI pressure is seen across the board in Feb-22

While YOY inflation captures the broad trend of wholesale inflation, it is sequential month-on-month inflation that captures momentum. Here is what momentum looks like.

• Overall, the WPI inflation has turned around from two months of negative price momentum back to positive momentum. MOM WPI inflation is up from -0.28% in Jan-22 to +1.40% in Feb-22.

• In Feb-22, there was positive turnaround in primary articles and fuel. Between Jan-22 and Feb-22, the primary article inflation turned around from -2.02% to +1.09%. Similarly, fuel inflation also turned around from -0.45% to +4.35%. In both cases, the softening momentum in inflation has been arrested and it is back to hardening momentum.

• In Feb-22, there was hardening of manufacturing inflation. Between Jan-22 and Feb-22, the manufacturing inflation hardened from 0.44% to 0.95%. In short, the manufacturing sector is seeing price pressures on a yoy basis as well as on a sequential basis.

• Manufactured products that saw a spike in Feb-22 included food products, oils & fats, textiles, paper & paper products, chemicals and chemical products, rubber & plastic products, basic metals, semi-finished steel and fabricated metals. In terms of Feb-22 versus Feb-21, biggest spikes were in textiles, paper products, chemicals and cement.

Summing up the WPI inflation story for Jan-22

On a sequential basis, the overall WPI inflation was up 1.40% in Feb-22. On a sequential basis, the food and primary articles inflation, manufacturing inflation and fuel inflation are higher. The big risk to WPI inflation emanates from how long the Russia Ukraine war continues, the extent of sanctions on Russia, trade disruptions etc. However, if Chinese demand tapers due to rising COVID cases, it could cause demand destruction pulling down WPI inflation, albeit with negative implications.

The broad message of the WPI inflation story appears to be that input costs are getting badly hit as the price of most commodities are going through the roof. Supply, this time around, has been deliberately managed to lag demand. The pressure on input costs is visible across Indian industries like chemicals, pharmaceuticals, paper, paints, FMCG etc. Most of these companies are seeing real margin pressure. With oil in that uncertain zone, it does not look like WPI inflation would come down in a hurry.

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