December WPI inflation scales higher to 0.73% on food price surge

15 Jan 2024 , 05:05 PM

In December 2023, the WPI inflation has surged further to 0.73% from 0.26% in November. If you look at the break-up of the WPI inflation, it is clearly loaded in favour of the food and primary articles. There is an interesting logic in WPI inflation measurement. The primary articles inflation includes food cropping as well as mining of minerals from the earth. However, the Office of the Economic Advisor also presents the Food basket index separately. The food basket comprises of the cropping basket from primary articles and manufactured food products from the manufacturing basket. That gives a more granular understanding of the break-up of WPI inflation.

As the data table will depict, the WPI inflation was in negative territory for 7 months between April 2023 and October 2023. It was only in November 2023 that the WPI inflation had turned to positive and in the latest month of December, the WPI inflation is more into the positive. In a sense, negative WPI inflation is not a good signal as it can be an indicator of price deflation in the long run. Price deflation is unfair to the manufacturer as they are not assured of a good price. Hence, businesses in such conditions, have only once choice and that is to cut output and jobs. While is why it is said that; although inflation is unfair, deflation can be inexpedient. In a sense, the WPI trend for December is almost the same as the trend of CPI inflation in the current month. Overall inflation has gone up, but the pressure has come from food products, while the core inflation has actually fallen lower.

WPI inflation versus PPI inflation

In the previous piece on WPI inflation, we had written about how the government plans to shift from the WPI inflation reading to a PPI reading. Now, PPI represents goods and services and it is the norm in all the other major nations. The shift to PPI would be coincide with two key changes that will happen in the WPI inflation reading. For one, the big shifts that India is planning on the WPI inflation front is changing the base year to make it more current and representative. That is something that has been done in the past and should not pose much of a challenge. However, the bigger change that India will face is the shift from WPI to PPI. Unlike the WPI, which is entirely product based, the Purchasing Power Index (PPI) is based on the combination of goods and services. This would give a better picture since Services account for more than 60% of the Indian economy. However, the transition will happen in a phased manner so that the comparative anecdotal picture does not get distorted. In the US and other countries, the PPI is able to clearly distinguish goods and services so that the specific drivers of inflation can be understood. Now that would be possible in PPI inflation. What remains to be seen is how this will impact the CPI inflation, since that is still product driven and not service driven. CPI and PPI must sync with GDP calculation methodology.

How WPI inflation traversed in the last 1 year

The table below captures the trend of CPI inflation and WPI inflation over the last one year. These are monthly numbers and captured on a yoy basis.

Month	WPI Inflation (%)	CPI Inflation (%)
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	-0.79%	4.70%
May-23	-3.61%	4.25%
Jun-23	-4.18%	4.81%
Jul-23	-1.23%	7.44%
Aug-23	-0.46%	6.83%
Sep-23	-0.07%	5.02%
Oct-23	-0.26%	4.87%
Nov-23	0.26%	5.55%
Dec-23	0.73%	5.69%

Data Source: Office of the Economic Advisor

If you look at the last 12 months of data as captured in the table above, the WPI inflation has finally turned around to positive in November after being in the negative zone for 7 months in a row. However, December has actually seen the positive consolidation of the WPI inflation. Of course, the sharp spike in the WPI inflation in December can be attributed to food related inflation, since manufactured products and fuel prices are still in the negative zone. So, the pressure has come entirely from the food sector only.

If you look back at the data for previous months, The final revision for October 2023 data has come in and it is slightly hawkish in the sense that the extent of negative inflation has reduced. For instance, the October 2023 WPI inflation estimate was revised higher by 26 basis points from -0.52% to -0.26%. This increases the likelihood that the final inflation figure for November and also for December could be higher than anticipated. However, it is best we wait for the actual revisions to come in to get a proper picture.

Key drivers of WPI inflation in December 2023

To understand the trend in WPI inflation, a quick look at the component wise break-up of WPI inflation should be useful input. The table below captures this underlying trend.

Commodity Set	Weight	Dec-23 WPI	Nov-23 WPI	Oct-23 WPI
Primary Articles	0.2262	5.78%	4.76%	2.26%
Fuel & Power	0.1315	-2.41%	-4.61%	-1.58%
Manufactured Products	0.6423	-0.71%	-0.64%	-1.06%
WPI Inflation	1.0000	0.73%	0.26%	-0.26%
Food Basket	0.2438	5.39%	4.69%	1.46%

Data Source: Office of the Economic Advisor

What is our quick reading of the yoy WPI inflation data above. Most of the bounce in WPI inflation in November 2023 and even in December 2023 came from the food and primary articles segment. Between October 2023 and November 2023, primary articles (comprising of mining and food cropping) saw WPI inflation increasing from 2.26% to 4.76%. In December 2023, primary articles inflation further increased from 4.76% to 5.78%. This trend was a lot more pronounced in the specific food basket which saw a spike from 1.07% to 4.69% and from 4.69% to 5.39% in the last two months. Manufacturing inflation stayed subdued, which keeps the end prices under check. However, it is still not too clear how the ongoing Red Sea crisis will impact the price of oil; and consequently, fuel inflation.

High frequency (MOM) perspective of WPI inflation

The yoy inflation we have seen till now is susceptible to the base effect. For a volatile data point like WPI, the MOM captures short term trends best. That is why the WPI report by the Office of the Economic Advisor, also looks at MOM (high frequency) WPI inflation. 

Commodity Set	Weight	Dec-23 WPI	Nov-23 WPI	Oct-23 WPI
Primary Articles	0.2262	-2.14%	0.86%	0.93%
Fuel & Power	0.1315	-0.71%	-0.13%	1.57%
Manufactured Products	0.6423	-0.21%	0.00%	0.00%
WPI Inflation	1.0000	-0.85%	0.26%	0.46%
Food Basket	0.2438	-1.75%	1.55%	1.07%

Data Source: Office of the Economic Advisor

Let us quickly look at how the WPI inflation on a MOM basis provides much deeper insights into the short term high frequency trends in the wholesale inflation. Here is a summary.

• Let us start with MOM inflation movement of the primary articles WPI inflation (which partially includes the food basket and partially the minerals mining basket). Primary index for December 2023 stood at -2.14%. This will comprise of Negative movement in prices of Non-food articles (-0.18%), Minerals (-1.91%), Food articles (-2.30%), Crude petroleum & natural gas (-4.28%) continued to put negative pressure on the primary goods basket. 

   

• Let us turn to the MOM WPI movement of Fuel & Power. The index for this group saw decline of 0.71% in December 2023 compared to November. The upward pressure here came from prices of Electricity (+1.34%), which was neutralized by prices of mineral oils (-1.54%) in December 2023.

   

• Finally, we come to the all-important Manufactured Products category. This segment saw -0.21% contraction on MOM basis in December over November 2023. Out of the 22 categories of manufactured products tracked by the WPI manufacturing basket, 15 groups witnessed an increase in prices, 7 groups witnessed decrease in prices. The price increases were led by machinery & equipment, other manufacturing, pharmaceuticals, medicinal & botanical products, electrical equipment, motor vehicles, trailers etc. The groups that saw negative WPI inflation on MOM basis included basic metals, food products, textiles, chemicals, chemical products, fabricated metal products, etc.

The overall story was that most of the high frequency upward thrust came from pharma and manufactured products. The downward thrust came from food, metals, and chemical products.

Swing factors in the WPI basket in December 2023

By swing factor, we mean, the key drivers of the WPI thrust either way. Before getting into the specifics of the components of the basket that is driving the WPI inflation basket, it is essential to understand the economic context. The last few months have seen pressure from the food basket and the reasons are not far to seek. A combination of erratic monsoons and intermittent floods resulted in lower than expected Kharif output. On the other hand, the Rabi output is likely to be impacted as the winter monsoons are tepid and the reservoirs are not full. To make matters worse, the supply chain constraints are causing delays in the Kharif output hitting the mandis. The answer to these questions is available in the table below. It captures the Swing factors in the WPI basket on both sides. The left side looks at upward thrust on the WPI inflation while the right side looks at the downward pressure on the WPI inflation. All the figures are on a yoy basis.

Commodity	WPI Inflation	Commodity	WPI Inflation
Onions	91.77%	Potatoes	-24.08%
Vegetables	26.30%	Vegetables / Animal oils & Fats	-16.36%
Pulses	19.60%	Oil Seeds	-7.31%
Paddy	10.54%	High Speed Diesel (HSD)	-6.72%
Milk	6.95%	Paper & Paper Products	-6.67%
Cereals	5.92%	Chemicals & Chemical Products	-5.69%
Minerals	5.79%	Semi-Finished Steel	-3.36%
Tobacco	5.54%	Textiles	-2.91%
Fruits	4.58%	Basic Metals	-2.58%
LPG	4.20%	Manufactured food products	-1.59%

Data Source: Office of the Economic Advisor

The story of the WPI inflation is now divided into two narratives, which are captured on the LHS and RHS of the above table. On the left side, it is predominantly the food product and some global minerals that are exerting positive pressure on the WPI basket. They are actually driving most of the spike in WPI inflation. Out of the top 10 upward drivers of WPI inflation, 8 are agricultural and food products while only two are commodities, which shows the inordinate role that food is playing in swinging the WPI inflation higher. The story is almost a repeat of the CPI inflation story where the food was again the major reason for the spike in CPI inflation in December 2023. 

What about the RHS of the above table, which includes the products that are depressing the WPI inflation? There is are 3 agricultural products viz. Potatoes, vegetable oils and oilseeds; and 1 petroleum product viz. high speed diesel (HSD). The rest of the products that are applying downward pressure on the WPI basket belong to manufacturing, which has the biggest weightage of 64.23% in the WPI basket. It is still the manufacturing basket that is holding the WPI inflation from rising too rapidly.

How will RBI interpret December 2023 WPI inflation reading?

At best, the RBI stays wary of too high or too low WPI inflation. Too high WPI inflation eventually translates into high CPI inflation while too low WPI inflation is detrimental to the profitability and investment goals of corporates. Even if that hypothetically keeps inflation in check, low WPI (especially negative WPI) impacts GDP growth in a big way. In November 2023, the WPI inflation had turned positive after 7 months of negative WPI inflation. December has consolidated that trend. The good news is that the WPI inflation appears to have bottomed out and that should gratify the RBI that slowdown pressures are almost ruled out. For now, the RBI has kept rates static since February 2023 and in the absence of any Red Sea shock, it looks unlikely to change the narrative too much.