WPI inflation spikes to 14.55% in Mar-22 adding to input costs

19 Apr 2022 , 07:31 AM

Between Feb-22 and Mar-22, wholesale price inflation (WPI) was up by 144 bps from 13.11% to 14.55%. This 14.55% spike in WPI inflation comes on a base of 7.89% inflation in Mar-21, so the relative impact is much higher. Over the next 3 months, WPI inflation could see gradual tapering as the base moves sharply higher. On a sequential basis, the spike in WPI inflation in Mar-22 was triggered by a spike in fuel and manufacturing inflation, followed by primary inflation.

What exactly is the practical application of WPI inflation? WPI inflation is a much better barometer of factory input costs as it assigns a high weightage of 64.23% to manufactured products. This is unlike CPI inflation, which is dominated by the food basket. WPI looks at prices from the producer perspective rather than consumer prices. This makes WPI inflation a sound lead indicator of margin pressures on Indian corporates.

WPI inflation trend in last one year

Mar-22 marked the 12th consecutive month WPI inflation stayed in double digits. That is a reflection of the deep impact that oil, gas, minerals and other inputs have had on overall costs. Higher WPI inflation was catalysed by the Ukraine war, which resulted in a sharp rally in a plethora of base commodities.

Data Source: Office of the Economic Advisor

One concern is upward revisions to WPI inflation. Jan-22 WPI inflation was originally estimated at 12.96% but now raised 72 bps to 13.68%. That is a lot of inflation that is being missed out and raises the spectre of recent WPI inflation also being revised higher.

On a yoy basis, manufacturing inflation has stabilized around 10%, although it is still high. Since manufacturing has 64.23% weight in the WPI basket, this will still keep overall WPI inflation in double digits. If you look at the break-up of the manufacturing basket, the pressure is visible in 18 out of the 22 items in the basket.

It was again a case of supply failing to keep pace with demand and Ukraine is worsening it. Under manufactured products, biggest pressure is seen on basic metals, food, textiles and chemicals. There was relief on transport equipment and other pharmaceutical products.

Dissecting the components of the WPI inflation basket

Commodity Set	Weight	Mar-22 WPI	Feb-22 WPI	Jan-22 WPI
Primary Articles	0.2262	15.54%	13.39%	15.60%
Fuel & Power	0.1315	34.52%	31.50%	34.36%
Manufactured Products	0.6423	10.71%	9.84%	9.50%
WPI Inflation	1.0000	14.55%	13.11%	13.68%
Food Basket	0.2438	8.71%	8.47%	9.55%

Data Source: Office of the Economic Advisor

There is an interesting trend in primary articles inflation. Food inflation is down to 8.71% but overall primary inflation (crops are a part of primary inflation) is up sharply to 15.54%. While most agri-related inputs are under control, mined inputs like minerals, crude and ores are experiencing rampant inflation; with crude inflation at 83.56% and minerals at 69.20%.

For Mar-22, fuel inflation continues to be out of control at 34.52%. Till February, the government was not raising the price of petrol and diesel, so that part was under control. But now with daily increases, the impact is being felt in Mar-22 and is likely to be carried forwards to Apr-22 also. Globally Brent Crude is back at $112/bbl.

Manufacturing inflation in Mar-22 at 10.71% yoy reflects key trends. Supply was struggling to keep pace and the Ukraine war has worsened it. Secondly, manufacturers are passing on higher costs to the end customers because they don’t have a choice. Finally, weak demand is also constraining capacity utilization in manufacturing and viable absorption of fixed costs.

When it comes to WPI, don’t miss the high frequency story

It is the high frequency month-on-month change in the various components of WPI inflation, that best captures the price story.

• For Mar-22, the overall WPI inflation is up sharply to 2.69%, showing strong price momentum in the short tun. In fact, the MOM WPI inflation has sharply moved up from -0.28% in Dec-21 to 0.35% in Jan-22 to 0.76% in Feb-22 and a steep 2.69% in Mar-22.
• In Mar-22, there was a substantial contribution made to WPI basket by the primary basket (especially oil, gas and minerals). From negative MOM inflation for the primary basket in the previous 3 months, it has jumped to 2.10% in the month of Mar-22.
• Mar-22 saw hardening of manufacturing inflation. It progressively moved from -0.07% in Dec-21 to 0.51% in Jan-22 to 0.87% in Feb-22 and 2.31% in Mar-22. The big drivers of manufacturing inflation in Mar-22 were basic metals, chemicals, food items and textiles.
• Finally, here is the real villain of the piece; fuel & power inflation. In fact, sequential fuel inflation spiked from -1.62% in Dec-21 to 1.12% in Jan-22 to 2.73% in Feb-22 and to a much steeper level of 5.68% in Mar-22 . Mineral oils contributed substantially to the spike in Fuel and Power inflation in Mar-22.

WPI inflation is giving clear pressure signals in Mar-22

It would be naïve to dismiss the clear signals coming from the WPI inflation in Mar-22. It is not just that the YOY inflation has spiked up sharply but even the sequential high frequency inflation has seen a spike. The spike has been intense across the 3 baskets of fuel, primary products and manufactured products. Supply chain constraints are pinching and they are pinching hard. The Ukraine war situation is only worsening the demand supply equations in the global market, resulting in a massive price advantage for commodity driven economies. Unfortunately, India is not one of them, so this translates into higher cost and lower OPMs.

The Q4 results have just about started coming out but the pressure is already visible. In the last 2 quarters, we did see Indian companies taking a hit on input costs and margins. However, they managed to pass on price hikes to consumers; substantially if not fully. Analysts believe a stage has come wherein price hikes can only happen at the risk of demand destruction. That is the trouble spot that WPI inflation leaves the Indian economy. For the RBI, it makes a strong case for an early rate hike to curb this rampant inflation.