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

Between February 2022 and May 2022 wholesale price inflation (WPI) had surged 277 bps from 13.11% to 15.88%.

July 15, 2022 11:20 IST | India Infoline News Service
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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