April 2023 WPI inflation dips into negative at -0.92%

16 May 2023 , 09:38 AM

From the peak of 16.63% in May 2022, WPI inflation has fallen 1,755 basis points to -0.92% in just 11 months. Each month has been progressively lower. The impact of the rate hike of 250 bps has been a lot more evident on the WPI inflation; but now it is starting to show on retail inflation also with a lag. Against the 1,755 bps fall in WPI inflation, retail inflation is down just 409 basis points from the peak. Retail inflation typically reacts with a lag, to shifts in interest rates while WPI is normally the lead indicator.

Month	WPI Inflation (%)	CPI Inflation (%)
Apr-22	15.38%	7.79%
May-22	16.63%	7.04%
Jun-22	16.23%	7.01%
Jul-22	14.07%	6.71%
Aug-22	12.48%	7.00%
Sep-22	10.55%	7.41%
Oct-22	8.67%	6.77%
Nov-22	5.85%	5.88%
Dec-22	4.95%	5.72%
Jan-23	4.73%	6.52%
Feb-23	3.85%	6.44%
Mar-23	1.34%	5.66%
Apr-23	-0.92	4.70%

Data Source: Office of the Economic Advisor (peak levels are shaded)

WPI inflation has generally been more sensitive and hence the impact of any rate hike is immediately visible in WPI inflation. The impact eventually gets transmitted to CPI inflation with a time lag, through the impact on consumer spending. Also, the manufacturing data has the highest weightage in WPI inflation and that is the most sensitive.

WPI inflation dips into negative -0.92% in April 2023

Overall WPI inflation is divided into primary articles (mining and crops), manufactured products and fuel & power. Manufactured products have the highest weightage of 64.23% in the WPI basket followed by primary articles at 22.62% and fuel & power at 13.15%. The sharp fall in manufacturing inflation played a key role in keeping it in negative territory for the second month in a row. Food basket has a weight of 24.38%; partly carved out of primary articles (food crops) and partly out of manufactured products (food products).

Commodity Set	Weight	Apr-23 WPI	Mar-23 WPI	Feb-23 WPI
Primary Articles	0.2262	1.60%	2.40%	3.64%
Fuel & Power	0.1315	0.93%	8.96%	13.96%
Manufactured Products	0.6423	-2.42%	-0.77%	1.94%
WPI Inflation	1.0000	-0.92%	1.34%	3.85%
Food Basket	0.2438	0.17%	2.32%	2.76%

Data Source: Office of the Economic Advisor

The WPI inflation at -0.92% in April 2023 is the lowest level of WPI inflation seen in the last 34 months.. Before halting rate hikes in April 2023, the RBI had already hiked rates by 250 basis points since May 2022. One big factor in the lower WPI inflation is that energy inflation has finally come down sharply on account of a growing base. That had a depressing effect on WPI inflation overall.

Which products moved WPI inflation in April 2023

The sharp fall in WPI inflation was across manufactured products and fuel. Manufacturing inflation fell from 1.94% in February 2023 to -0.77% in March 2023 and dipped further into the negative at -2.42% for April 2023. With a weightage of 64.2% in the overall WPI basket, manufacturing had an oversized impact in pulling down WPI inflation. Energy inflation dipped on higher base effect as it fell with the global commodity correction from 13.96% in February 2023 to 8.96% in March and sharply to 0.93% in April 2023. Food inflation, manufacturing inflation and fuel inflation are at a multi-year low level.

Commodity	WPI Inflation	Commodity	WPI Inflation
Cereals	7.69%	Vegetable & Animal Oils	-25.91%
Wheat	7.27%	Potatoes	-18.66%
Paddy	7.12%	Onions	-18.41%
Milk	7.10%	Oil Seeds	-15.54%
Minerals	6.87%	LPG	-10.49%
Pulses	5.55%	Basic Metals	-9.80%
Non-metallic minerals	3.37%	Crude Petroleum	-9.44%
Cement, Lime, Plaster	3.22%	Semi-finished steel	-8.33%
Beverages	2.51%	Food Products	-5.65%
Wearing Apparel	2.25%	Fruits	-4.55%

Data Source: Office of the Economic Advisor

In terms of specific products, oil, and gas, which was an inflation booster till March has turned into an inflation depressant in April 2023. The biggest contribution to inflation came from the agricultural basket which accounted for the top 4 and included cereals, wheat, paddy, and milk. Let us now turn to the negative triggers for WPI inflation in April 2023. For instance, Vegetable oils at -25.91%, Potatoes at -18.66%, Onions at -18.41%, and oilseeds at -15.54% kept WPI inflation in check. The boosters and depressants came from agri space.

Fact checks on high frequency WPI inflation (MOM)

While WPI inflation is generally presented on YOY basis, the DIPP also presents high frequency MOM picture. Like the Bureau of Labour Statistics (BLS) in the US does, the DIPP also gives month-on-month WPI inflation to help track high frequency trends in wholesale inflation. High frequency data provides insights on short term inflation momentum. In a volatile macro environment, the yoy inflation is vulnerable to the base effect. This can be overcome by combining them with the MOM inflation, to capture short term headwinds and tailwinds in the macroeconomic data. Here are some key takeaways.

• For April 2023, MOM WPI inflation was once again absolutely flat and at the same level as March 2023. In 2 out of last 6 months, the MOM WPI inflation has been negative and in the recent 2 months the WPI inflation has been neutral.

   

• Is there MOM pressure on WPI basket? April 2023 sequential WPI inflation is -2.68% lower for fuel & power and it is neutral for manufacturing. However, the MOM inflation for the primary basket and the food basket continues to be in the positive, hinting that the weak Kharif has put pressure on inflation; and monsoons will still hold the key.

MOM numbers are a kind of 2-way street. They capture short-term trends better but they also tend to be vulnerable to short term base effects. However, it is a good way to ratify the yoy WPI inflation trend and better capture some short term trends in the data.

Would the RBI be influenced by the falling WPI?

To be fair, one can say that the RBI has already made up its mind on the inflation control strategy. Unless there is an inflation emergency in the economy, the RBI may be done with rate hikes. 250 bps is a lot in the Indian context and it has been hurting a lot of companies in the form of higher cost of funds and lower solvency ratios. WPI inflation is a lead indicator for CPI inflation and to that extent it is an important indicator. The RBI had bet on sharply falling WPI inflation to rub off on CPI inflation; which explains their decision to halt rate hikes in February 2023 itself. In a sense, the stand of the RBI has been vindicated as the CPI inflation has come down to 4.70%, falling 96 bps in April over March. 

One question that still lingers is whether the RBI decision to hold rates in April 2023 Was a pause or a shift in approach? It looks more like a bold experiment. There was the risk of monetary divergence and the RBI has taken on that risk to protect the balance sheets of Indian corporates. Going ahead, the policy will be more India centric and worry less about convergence with western monetary thinking.

Wholesale inflation is into negative zone and hopefully that should rub off into lower input prices and wider profit margins in the coming quarters. Evidence of that is already available in the fourth quarter of FY23 (Q4FY23). RBI still has a trapeze walk to contend with. It must make hard choices between falling wholesale inflation, sticky consumer inflation, uncertain growth and rising rates pinching corporate bottom lines. Under the circumstances, the RBI has taken the best decision possible.