August 2023 WPI inflation stays negative

14 Sep 2023 , 05:57 PM

However, there is a small change. For the last 13 consecutive months, each month had reported lower WPI inflation compared to the previous month. That trend was broken in the month of July 2023 as WPI contraction reduced from -4.12% in June 2023 to -1.36% in July 2023. In August 2023, that trend has been has again been broker with WPI inflation reported at -0.52%, inching close to the parity mark In India, wholesale inflation (WPI) is announced a couple of days after the consumer inflation. The fall in WPI inflation in last 1 year has been much sharper, compared to consumer or CPI inflation.

Between May and August 2023, we saw consumer inflation (CPI) bounce from 4.25% to 4.81% and then to 7.44%, before settling at 6.83% in August 2023. The spike in CPI inflation was led by food items and the trend is almost similar in WPI inflation also. The only difference is that WPI inflation continues to be in the negative. However, the extent of contraction in WPI inflation has been easing gradually and it is now moving towards the zero mark. WPI inflation is important as it acts as a lead indicator for consumer inflation. Since May 2023, we have been highlighting that the fall in WPI inflation may not sustain further due to pressure on high frequency data. That actually turned out true from July 2023.

How WPI inflation panned out in last 1 year

If July 2023 marked a break in trend of falling WPI inflation, then August has just perpetuated that trend. After 13 consecutive months of progressively lower wholesale inflation, the WPI inflation contracted less in July compared to June; and that trend has been replicated in August also. From the peak of 16.63% in May 2022, WPI inflation had fallen all the way to -4.12% in June 2023. From the lows of June 2023, WPI inflation has progressively bounced to  -1.36% and -0.52% respectively in July and August 2023.

It must be mentioned here that the 250 bps rate hike by the RBI between May 2022 and February 2023 has had a profound impact on WPI inflation but a lagged impact on CPI inflation. That is typically how the two inflations react. The table below captures a time series comparison of consumer and producer inflation over the last one year.

Month	WPI Inflation (%)	CPI Inflation (%)
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%
May-23	-3.48%	4.25%
Jun-23	-4.12%	4.81%
Jul-23	-1.36%	7.44%
Aug-23	-0.52%	6.83%

Data Source: Office of the Economic Advisor

One may wonder why this dichotomy in WPI and CPI inflation? There are 2 reasons for this dichotomy. WPI inflation is more sensitive to macro policy changes and hence the impact of any rate hike is immediately visible in producer prices and hence on WPI inflation. Also, the impact tends to be magnified in case of WPI inflation as it is seamless. The impact has also to do with the composition. While CPI inflation is biased towards the food basket, the WPI inflation is biased towards the manufacturing goods basket. The impact does eventually get transmitted to CPI inflation with a time lag, through consumer spending. However, the eventual impact on CPI inflation tends to be smaller and also a lot smoother and normalized compared to the violent impact on WPI inflation

WPI inflation negative, but moderates further to -0.52% in August

WPI inflation basket is divided into 3 major segments viz., primary articles (mining and crops), manufactured products and fuel & power. Manufactured products have the highest weightage of 64.23% in WPI basket followed by primary articles at 22.62% and fuel & power at 13.15%. Over the last 13 months, the sharp fall in manufacturing had kept pushing WPI inflation lower. The food basket has a weight of 24.38%; partially carved out of primary articles (food crops) and partly out of manufactured products (food products).

Commodity Set	Weight	Aug-23 WPI	Jul-23 WPI	Jun-23 WPI
Primary Articles	0.2262	6.34%	7.57%	-2.98%
Fuel & Power	0.1315	-6.03%	-12.79%	-12.51%
Manufactured Products	0.6423	-2.37%	-2.51%	-2.78%
WPI Inflation	1.0000	-0.52%	-1.36%	-4.18%
Food Basket	0.2438	5.62%	7.75%	-1.30%

Data Source: Office of the Economic Advisor

What explains the negative WPI inflation moderating from -4.12% in June 2023 to -0.52% in August 2023? In one word, the answer is food and food products. Even in CPI inflation, the recent inflation readings got impacted by the spike in food inflation. In the WPI basket, the food prices are up yoy, but fuel prices are also losing the low base effect.

In July, when the trend of falling WPI inflation had reversed, the big question whether this was a flash in the pan or a change in underlying trend. August has proved that this is actually a shift in the underlying trend where the loss of base effect and a gradual spike in the price of food and fuel is pushing all kinds of inflation away from the lows.

Food products continue to drive WPI inflation in August 2023

A cursory glance at the WPI basket in the last 2 months, was suggestive that agricultural items were causing most of the positive pressure on inflation while fuel was keeping WPI inflation in the negative. Till June 2023, food inflation, fuel inflation and manufacturing inflation remained in the negative. In July 2023, fuel and manufacturing inflation continue to remain in negative while food inflation has bounced sharply into positive. However, in August, not only has the food basket showed higher prices, but even fuel is beginning to apply pressure on the wholesale inflation, which is not surprising with Brent Crude already at $92/bbl amidst tighter supplies.

Food inflation has been rising due to the delayed monsoons and that is having a rather profound impact on the food basket. This year, it was a double whammy for food as first the delayed monsoons and later the deluge wreaked havoc on output and also on logistics of getting the crops to the mandis. It is hoped that these inflation readings will moderate once the stocks start arriving in the mandis. While manufacturing inflation is still in negative, the momentum is slowing, especially in the case of fuel inflation. It now looks like WPI inflation may have bottomed out at -4.12% in June 2023. 

Commodity	WPI Inflation	Commodity	WPI Inflation
Vegetables	48.39%	Potatoes	-24.02%
Onions	31.42%	LPG	-24.01%
Minerals	11.66%	Vegetable Oil and fats	-20.87%
Pulses	10.45%	Fruits	-12.88%
Paddy	9.18%	High Speed Diesel (HSD)	-11.30%
Milk	7.79%	Paper Products	-10.36%
Wheat	5.81%	Oil Seeds	-9.41%
Tobacco Products	5.30%	Crude Petroleum	-9.10%
Leather Products	2.84%	Textiles	-8.46%
Beverages	2.26%	Chemicals	-7.03%

Data Source: Office of the Economic Advisor

The story of the WPI inflation is now distinct divided into two distinct narratives. On the left side, it is the food product and some minerals that are driving most of the moderation in negative inflation in July and August. In August, we are also seeing the export oriented manufactured output of tobacco and leather products pulling up WPI inflation. However, if you look at the manufacturing and fuel basket, the inflation is still well in the negative and also rather stable as manufacturing companies are still reaping the substantial benefits of the sharp fall in commodity prices globally. 

A very sharp fall in WPI inflation is never a good sign as it shows unremunerative prices. To that extent, it is good that the WPI inflation fall is moderating. Falling WPI inflation helps up to a point. Beyond that point, the falling WPI inflation can actually be counterproductive. That is something policy makers generally keep in mind when deciding on the policy response.