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WPI inflation tapers in June 2022, but still above 15%

  • India Infoline News Service
  • 15 Jul , 2022
  • 11:20 AM
In comparison, the WPI inflation tapered to 15.18% in June 2022. However, that would still leave the markets disappointed for 2 reasons. Firstly, despite the hawkishness shown by the RBI, the impact on WPI inflation has only been marginal. Secondly, the 15.18% WPI inflation in June 2022 is on a rather high base of 12.07% in June 2021. Despite the fall in headline WPI inflation, the fuel & power inflation is still above 40%.

How is WPI inflation different from CPI inflation and why is it material from a policy perspective? The basic difference is in the weightages in the basket. While CPI inflation assigns the highest weightage to the food basket, WPI inflation assigns a weight of 64.23% to manufactured products. Thus WPI inflation becomes a better measure of producer costs. In the current global scenario, where supply chain constraints are driving inflation, WPI inflation gives a better picture. Even from a policy perspective, the RBI would breathe easy only when WPI inflation comes down.

Double digit WPI inflation for 15 months in a row

June 2022 not only marked the 15th consecutive month of double-digit WPI inflation, but was the third successive month of WPI inflation above 15%. But there is some respite compared to the 31-year high WPI inflation reported in May 2022. WPI inflation has been triggered by the Ukraine war, Russia sanctions, China lockdown and monetary tightness.



Data Source: Office of the Economic Advisor

One concern is upward revisions to previous WPI inflation estimates. The April 2022 WPI inflation estimates have been scaled up by 30 bps from 15.08% to 15.38%. This opens the possibility that the May 2022 and the June 2022 WPI inflation could be revised upwards.
On a yoy basis, manufacturing inflation tapered lower from 11.39% in April 2022 to 10.11% in May 2022 and further to 9.19% in June 2022. Since manufacturing has a weightage of 64.23% in the WPI basket, it will keep overall WPI inflation in check, but food and fuel are major risks. In the overall WPI basket; only onions and pulses are showing negative WPI inflation.
The highest producer inflation in June 2022 was in crude petroleum at 77.29%, vegetables at 56.75%, LPG at 53.20% and potatoes at 39.38%. The broad narrative has not changed much over the last few months. The ongoing war in Ukraine and the COVID restrictions in China are only adding to the supply side bottlenecks.
How WPI components panned out in last 3 months
Commodity Set Weight Jun-22 WPI May-22 WPI Apr-22 WPI
Primary Articles 0.2262 19.22% 19.71% 15.18%
Fuel & Power 0.1315 40.38% 40.62% 38.84%
Manufactured Products 0.6423 9.19% 10.11% 11.39%
WPI Inflation 1.0000 15.18% 15.88% 15.38%
Food Basket 0.2438 12.41% 10.89% 9.13%
Data Source: Office of the Economic Advisor

Surprisingly, the primary basket inflation continues to be elevated. The spike in Primary Articles inflation is more pronounced in food basket and less in minerals. Primary Articles inflation surged from 15.18% in April 2022 to 19.22% in June 2022. At the same time primary food inflation surged from 9.13% in April 2022 to 12.41% in June 2022. This is an important trigger keeping overall WPI inflation high.

Between April 2022 and June 2022, fuel inflation rallied from 38.84% to 40.38%. The spike in the prices of petrol and diesel has not kept pace with the spike in crude oil and that can be largely attributed to cheap Russian imports of crude oil, which is coming into India at a discount of 20% to 25% over the international crude prices.

On the positive side, the manufacturing inflation has fallen sharply from 11.39% in April 2022 to 9.19% in June 2022. Clearly, the tightness forced by the RBI and the fears of a recession globally have led to tapering of manufacturing inflation. In the context, this has a lot more importance since manufacturing has a weight of over 64% in the overall WPI basket. It looks like a situation wherein higher prices combined with recession fears are keeping demand for manufactured products subdued. That is dark side of WPI inflation.

A quick look at the high frequency WPI data for June 2022

While WPI inflation is generally presented YOY, it adds value to also check the MOM WPI inflation as it captures the high frequency trends much better.

·         For June 2022, overall MOM WPI inflation was absolutely flat at 0.00%. That is a sharp tapering of the high frequency WPI inflation number from 2.48% in the month of March 2022 to 0.00% in June 2022. There is clear tapering of inflation momentum in June 2022.


·         The MOM data captures the short term momentum. To get a clear picture of the pressure point, look at the primary articles inflation. Within the primary articles basket, while the overall primary basket has tapered MOM, the primary food index has not tapered much, indicating that a lot of the short term pressure comes from agriculture.


·         June 2022 saw manufacturing inflation on a MOM basis dip into the negative at -0.76%. It has steadily fallen from a high of 2.45% in March 2022. Even if you look at the fuel and power inflation, it has fallen sharply from 5.07% in April 2022 to 0.65% in June 2022.
MOM numbers capture short term trends better but they also tend to be vulnerable to short term base effects. The message is that the key pressure is still in the primary basket.

Why the RBI would be more worried about WPI inflation?

Between April 2022 and June 2022, consumer inflation (CPI inflation) tapered from 7.79% to 7.01%. During this period, WPI inflation fell from 15.38% to 15.18%. RBI has hiked repo rates by 90 bps in May and June 2022 and CRR by 50 basis points. That has impacted CPI inflation, but the impact on WPI inflation is limited. WPI inflation is a lot of imported inflation and needs international tapering of prices and smoother supply chains.

The Q1FY23 corporate results have just started trickling in and the early indications from the IT sector are the that operating margins are under pressure. We saw that trend in Q3FY22 and Q4FY22 and that trend is likely to repeat in Q1FY23 also. The message from the WPI number is that monetary levers may have played their part and more fiscal measures will be needed to rein in WPI inflation. With pressure on government revenues, that would be a tough call for the government.
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WPI inflation drops below 14% as RBI breathes easy

  • India Infoline News Service
  • 17 Aug , 2022
  • 9:48 AM
Just as the surge in CPI inflation had been arrested, it looks like the surge in WPI has also been arrested. It may be recollected that between February 2022 and May 2022 wholesale price inflation (WPI) had surged 320 bps from 13.43% to 16.63%. In comparison, the WPI inflation tapered to 15.18% in June 2022 and dropped further to 13.93% in July 2022.

Since the first round of RBI rate hikes in May 2022, WPI inflation dropped by 270 bps. There are still two factors to worry about. Firstly, the May inflation final revision took WPI inflation from 15.88% to 16.63%. Secondly, the 13.93% WPI inflation in July 2022 is on a rather high base of 11.57% in July 2021. Also, fuel inflation spiked in July 2022 to well above 43%.

Here is why WPI inflation is as material to RBI monetary policy as CPI inflation. The highest weightage in CPI inflation is assigned to the food basket while WPI inflation assigns the highest weight of 64.23% to manufactured products. WPI inflation is a better barometer of producer costs. In the current scenario, where supply chain constraints are driving inflation, WPI inflation gives a better picture. That is why the RBI would breathe a lot easier with WPI inflation falling well below the 14% mark and losing 270 bps from its recent peak.

WPI inflation has been in double digits for 16 consecutive months

July 2022 marked the 16th consecutive month of double-digit WPI inflation, but fell below 14% for the first time since February 2022. There is significant respite compared to the 31-year high WPI inflation of 16.63% reported in May 2022. WPI inflation has been worsened by the Ukraine war, Russia sanctions, China lockdown and monetary tightness.



Data Source: Office of the Economic Advisor

Manufacturing inflation yoy tapered from 11.39% in April 2022 to 10.27% in May 2022, 9.19% in June 2022 and now to 8.16% in July 2022. Since manufacturing has a weightage of 64.23% in the WPI basket, it will surely keep overall WPI inflation in check. However, food and fuel are major risks. In the overall WPI basket; only onions and oilseeds are showing negative WPI inflation, while the producer inflation in pulses is virtually flat.

The highest producer inflation in July 2022 was in crude petroleum and natural gas at 65.84%, Potatoes at 53.5%, LPG at 32% and fruits at 29% were elevated too. One thing that beats analysis is why is oil inflation higher despite falling crude prices and cheaper oil imports from Russia. One can argue that this is a yoy number, but crude oil and gas inflation has surged even on sequential MOM basis.  

Story of WPI components over last 3 months
Commodity Set Weight Jul-22 WPI Jun-22 WPI May-22 WPI
Primary Articles 0.2262 15.04% 19.22% 18.84%
Fuel & Power 0.1315 43.75% 40.38% 49.00%
Manufactured Products 0.6423 8.16% 9.19% 10.27%
WPI Inflation 1.0000 13.93% 15.18% 16.63%
Food Basket 0.2438 9.41% 12.41% 10.58%
Data Source: Office of the Economic Advisor

In the last few months, we have seen primary articles inflation and food basket inflation staying elevated. However, in July 2022, there is a visible tapering of primary articles inflation and food basket inflation. The overall vegetables basket inflation has come down sharply led by negative onion inflation. That has resulted in lower food inflation. Even mining products are down as is evident from primary articles inflation falling to a greater extent than food inflation. Primary Articles inflation surged from 18.84% in May 2022 to 19.22% in June 2022, but fell sharply to 15.04% in July 2022. This is an important trigger that has helped the overall WPI inflation to taper.

Fuel continues to be a problem. Between May 2022 and June 2022, fuel inflation fell from 49% to 40.38%. However, in July 2022, the fuel inflation has again spiked to 43.75%, but this can be largely attributed to non-crude related fuel and due to the base effect. The spike in the prices of petrol and diesel has not kept pace with the spike in crude oil and that the outcome is evident in the massive losses that the OMCs like IOC, BPCL and HPCL have recorded in Q1FY23.

On the positive side, the manufacturing inflation has fallen consistently from 11.39% in April 2022 to 8.16% in July 2022. Clearly, the tightness forced by the RBI and the fears of a recession globally have led to tapering of manufacturing inflation. In the context of WPI inflation, manufacturing has a lot more importance due to its weight of 64.33% in the WPI basket. It looks like a situation wherein higher prices combined with recession fears are keeping demand for manufactured products subdued. But, caution is not good economics.

How the high frequency data looked in July 2022

While WPI inflation is generally presented YOY, the high frequency data on a MOM basis gives useful insights on the short term momentum.

·         For July 2022, overall MOM WPI inflation was down -0.13%, so the momentum is consistently tapering. That is a sharp tapering of the high frequency WPI inflation number from 2.48% in the month of March 2022 to -0.13% in July 2022.


·         The MOM data captures the short term momentum. A clear picture of the pressure point is evident if you look at the primary articles inflation. Within primary basket, while the food basket has contracted MOM, the overall primary basket is down much sharper. Hopefully, the news of a decent Kharif should bring down wholesale food prices too.


·         June 2022 saw manufacturing inflation on a MOM basis dip into the negative at -0.90% and in July it is still negative at -0.42%. It has steadily fallen from a high of 2.45% in March 2022. The only exception is the fuel inflation, which is up 6.56% in July 2022, over the previous month.

MOM numbers capture short term trends better but they also tend to be vulnerable to short term base effects. The message is inflationary only on the oil and gas front.

Why the RBI will breathe a sigh of relief

Between April 2022 and July 2022, consumer inflation (CPI inflation) tapered from 7.79% to 6.71%. Now, between May 2022 and July 2022, WPI inflation has also fallen from 16.63% to 13.93%. RBI has already hiked repo rates by 140 bps between May and August 2022 and CRR by 50 basis points. The effect is showing now on CPI inflation and also on WPI inflation. WPI inflation has an import content, so the global commodity taper has helped matters.

The Q1FY23 corporate results are done and dusted. While net profits for Q1FY23 are up yoy, they are sharply lower on QOQ basis. That is largely due to the downstream oil companies. It remains to be seen how the RBI interprets this data. Hopefully, if August inflation also maintains the downward journey, the RBI will have reason to go slow on its hawkishness. That is what the Fed may do and the RBI may also gradually shift its focus from containing inflation to boosting growth. That is where the core edge of Indian economy lies.

December WPI inflation down to 4.95% led by food

  • 18 Jan , 2023
  • 7:41 AM
  • The impact of the sharp spike in repo rates by 225 basis points is most visible in the fall in WPI inflation.

The wholesale price index (WPI) or producer inflation had surged to a high of 16.63% in the month of May 2022. Incidentally, that was also the month when the rate hikes started in India. As the RBI hiked rates by 225 basis points between May and December 2022, the WPI inflation fell from 16.63% to 4.95%; a fall of 1,168 basis points. WPI inflation is now at a 22-month low of 4.95% and a full 65 basis points below the Bloomberg consensus estimates.

What explains this sharp negative causal effect in the case of WPI inflation but not so much in the case of CPI inflation? WPI inflation is the more sensitive inflation and hence the impact of any hike in the rate of interest is first visible in the WPI inflation. However, there is a lag for the effect to get transmitted to CPI inflation and that is the reason for the delay. More often than not, the CPI inflation is a lag indicator of the WPI inflation and that is how it is likely to play out.

Would the Monetary Policy Committee (MPC) of the RBI really be happy with the sharp fall in the WPI inflation. The assumption is that CPI inflation would follow suit, but these are early days and a lot would depend on the price of crude oil. MPC would take the falling WPI as an indication that manufacturing costs are coming down.

WPI inflation is experiencing all-round fall

The sharp fall in WPI inflation has been across the board. Manufacturing inflation yoy fell from 4.42% in October to 3.59% in November 2022 and now to 3.37% in December 2022. Since manufacturing has a weightage of 64.2% in the WPI basket, it has an oversized impact in pulling down WPI inflation. Food inflation and energy inflation have also been tapering amidst a global commodity correction. While food inflation has fallen from 6.60% to 0.65% in the last 3 months, the fuel inflation has fallen from 25.40% to 18.09%.

In terms of specific products, highest producer inflation in December 2022 was in crude oil at 39.71% followed by HSD at 35.49%, Potatoes 22.38%, wheat 20.72%, cereals 14.0%, cement 8.26% and mineral products at 7.67%. Ironically, the sharpest fall has been in manufactured products while oil inflation is up over last month. Also, in the food basket, it is only vegetables and onions that are deep in the negative, but most of the other products in the food basket are having positive inflation. For instance, vegetables at -35.97%, Onions at -25.97%, LPG at -14.76% and vegetable oils at -6.05% kept overall WPI inflation in check. 

WPI story over last 3 months

Commodity Set

Weight

Dec-22 WPI

Nov-22 WPI

Oct-22 WPI

Primary Articles0.22622.38%5.52%11.17%
Fuel & Power0.131518.09%17.35%25.40%
Manufactured Products0.64233.37%3.59%4.42%
WPI Inflation1.00004.95%5.85%8.67%
Food Basket0.24380.65%2.17%6.60%

Data Source: Office of the Economic Advisor

WPI is a better test of the efficacy of rate hike impact since it is first felt on WPI inflation and CPI inflation is a lag effect. The sharp fall in manufacturing inflation is good news since it is indicative that the cost of manufacturing is going to come down across products. Also, the sharp fall in food inflation; both in the primary segment and the processed foods segment is a signal that the food cycle is finally turning favourable and could have positive impact on consumer inflation with a lag. Of course, the pressure of a weak Kharif in this year is only going to be partially offset by the positive vibes coming from the Rabi season.

One key risk to WPI inflation is that higher cost of funds has imposed a higher financial cost on companies. This could impact cost of funding for Indian companies as also have an impact on solvency. That is something to be observed.

A quick look at high frequency WPI data

While WPI inflation is generally presented YOY, the DIPP also presents a high frequency MOM picture; like the Bureau of Labour Statistics (BLS) in the US provides. High frequency data provides useful insights on the colour and direction of short term momentum and short term shifts as it captures the macro pressures more effectively than YOY data.

  • For December 2022, overall MOM WPI inflation contracted by -1.12%, deeper than the cuts seen in the month of November. 

     
  • Is there any MOM pressure likely now? For the month of December 2022, the sequential WPI inflation is lower across all categories. There are two risks here. Firstly, China has shown slower growth and a slew of fiscal boosters could prop up oil prices. Secondly, unless China joins the global supply chain mainstream, the pressure of input prices is going to be around.

     
  • The big boost to the fall in short term WPI inflation has come from the primary goods and the food basket. Food prices are down sharply, led by vegetables and onions, although prices of potatoes, wheat and cereals are under pressure. However, overall food and primary inflation has tapered on a sequential basis.

MOM numbers capture short term trends better but they also tend to be vulnerable to short term base effects. However, it is a good measure to check the momentum of data.

RBI will shift stance, but it will shift gradually

RBI has now seen retail CPI inflation below the 6% mark for 2 months in succession. However, the bigger cause for celebration is that the WPI inflation has fallen by 1,178 basis points since the May 2022 peak. The real concern is that high cost of funds is putting pressure on the interest coverage ratio of Indian companies and the rural demand is under a lot of pressure. For now, the focus of the RBI would be on having clarity that there is no arbitrage for risk-off investors in the US markets over India. That could trigger outflows, which can be a tight scenario.

How can the RBI address this situation. There are members in the MPC like Jayanth Varma and Ashima Goyal who have openly called for a pause on rate hikes and a shift in focus to growth. For the Indian economy, there are several imperatives as captured below.

  • Firstly, the RBI and the government must do the best they can to ensure that the revival in IIP growth is sustained. One of the pre requisites for this revival is low cost of funds. That is something that RBI can control and it is essential.

     
  • At the other end, there is the risk that too much focus on growth can take the focus away from inflation and the CPI inflation is still well above the median rate of 4% and just about lower than the maximum permissible rate. In these circumstances, the RBI may prefer to continue to be hawkish for some more time.

     
  • The key issue may be core inflation, which continue to be sticky. The hope is that more hawkishness can bring down inflation expectations and the core inflation along with that. RBI cannot do a total shift to growth focus. It has to still focus on that delicate middle path.

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  • 17 August, 2022 |
  • 10:48 AM

Just as the surge in CPI inflation had been arrested, it looks like the surge in WPI has also been arrested.

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