Jan-23 WPI inflation lower at 4.73% led by fuel and manufacturing

15 Feb 2023 , 07:28 AM

From the peak of 16.63% in April 2023, WPI inflation has fallen 1190 basis points to 4.73% over 8 months. The impact of the rate hikes of 250 bps has been best felt on WPI inflation; but not much on CPI inflation. As you can see from the table below, WPI inflation has fallen 1190 bps from the May 2022 peak while the retail inflation is just about 127 basis points down from the April 2022 peak. This could be because retail inflation reacts with a lag, but we shall come back to that later.

Month	WPI Inflation (%)	CPI Inflation (%)
Jan-22	13.68%	6.01%
Feb-22	13.43%	6.07%
Mar-22	14.63%	6.95%
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%

Data Source: Office of the Economic Advisor

To encapsulate the WPI versus CPI story, WPI inflation has always been more sensitive and hence the impact of any hike in the rate of interest is immediately visible in the WPI inflation. The impact should get transmitted to CPI inflation with a lag. 

WPI inflation trend in last 3 months

Overall WPI inflation is divided into primary articles (mining and crops), manufactured products and fuel & power. Manufactured product has 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 is good news since it indicates cost of manufacturing is coming down across products. Food basket has a weight of 24.38%, but this is partly carved out of primary articles (food crops) and partially manufactured products (food products). As seen in the retail basket, even WPI basket has seen food inflation spike in January 2023.

Commodity Set	Weight	Jan-23 WPI	Dec-22 WPI	Nov-22 WPI
Primary Articles	0.2262	3.88%	2.38%	5.94%
Fuel & Power	0.1315	15.15%	18.09%	19.71%
Manufactured Products	0.6423	2.99%	3.37%	3.44%
WPI Inflation	1.0000	4.73%	4.95%	6.12%
Food Basket	0.2438	2.95%	0.65%	2.52%

Data Source: Office of the Economic Advisor

The WPI inflation of 4.73% in January 2023 is the lowest level of WPI inflation seen in the last 23 months; and largely a reaction to persistent rate hikes by the RBI. One key risk to WPI inflation is that higher cost of funds has imposed a steeper 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, especially since the December 2022 quarter saw interest cost of companies go up 25% yoy.

What moved WPI inflation in January 2023?

The sharp fall in WPI inflation was across manufactured products and fuel; but WPI inflation of food products and primary articles were up. Manufacturing inflation fell from 3.44% in November 2022 to 3.37% in December 2022 and to 2.99% in January 2023. Manufacturing, with a weightage of 64.2% in WPI basket, has an oversized impact in pulling down WPI inflation. Energy inflation tapered amidst a global commodity correction to 15.15%, but food inflation spiked from 0.65% to 2.95% in January 2023. Here are some key product triggers.

Commodity	WPI Inflation	Commodity	WPI Inflation
HSD	28.47%	Vegetables	-26.48%
Crude Petroleum	23.79%	Onions	-25.20%
Wheat	23.63%	Minerals	-9.26%
Petrol	15.54%	LPG	-8.30%
Cereals	15.46%	Vegetable Oil	-7.80%
Potato	9.78%	Oil Seeds	-4.22%
Milk	8.96%	Textiles	-2.14%

Data Source: Office of the Economic Advisor

In terms of specific products, highest producer inflation in January 2023 was in HSD at 28.47% followed by Crude at 23.79%, Wheat at 23.63%, Petrol at 15.54%, cereals 15.46%, Potatoes at 9.78% and Milk at 8.96%. Let us now turn to the negative triggers for WPI inflation in January 2023. For instance, vegetables at -26.48%, Onions at -25.20%, Minerals at -9.26%, LPG at -8.30% and vegetable oils at -7.80% kept overall WPI inflation in check. 

High frequency WPI inflation and the key pointers

While WPI inflation is generally presented YOY, the DIPP also presents a high frequency MOM picture; much like the Bureau of Labour Statistics (BLS) in the US provides. High frequency data provides critical insights on the direction of short term momentum and short term shifts. In a volatile macro environment, the very short term headwinds and tailwinds are best captured by the MOM data on WPI inflation. Here are key takeaways.

• For January 2023, overall MOM WPI inflation expanded by 0.13%. In 4 out of last 6 months, the MOM WPI inflation has been negative. This could indicate WPI inflation close to bottoming out.

   

• Is there MOM pressure right now? For January 2023, sequential WPI inflation is -1.39% lower for fuel & power, while primary articles are up 0.93% MOM and manufactured products up 0.14% MOM. A lot depends on China joining the global supply chain.

   

• The area of concern is the short term spike in the inflation in the food basket, Especially of note is the sharp spike in the price of cereals, wheat, potatoes and milk; which have pulled up the food basket sharply in January 2023.

MOM numbers are a kind of two way street. They do 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 and ratify the trends in the yoy numbers.

RBI will shift stance, but it will shift gradually

Will RBI rely more on WPI inflation than on CPI inflation and change its monetary stance? That looks unlikely if you go by the language of the RBI in February policy meet. RBI has withdrawn the accommodative stance of monetary policy; meaning it would still prefer to focus on controlling inflation rather than growth triggers. RBI may prefer to see CPI inflation coming closer to 4% before conceiving any change in stance. In January 2023, CPI inflation had bounced back to 6.52%, after staying below 6% for two months in succession. 

While WPI inflation falling by 1190 basis points from the May 2022 peak is gratifying, the RBI would still prefer to wait till the retail inflation converges towards 4%. MPC members Jayanth Varma and Ashima Goyal openly called for a pause on rate hikes and a shift in focus to growth. In February 2023 MPC meet, they voted against the rate hike and against the withdrawal of the accommodative policy approach. Here is what RBI may focus on.

• In the last few months, the cost of funds of Indian corporates has gone up sharply even as banks have been making hay with a much wider net interest margin (NIM). While keeping inflation in check and avoiding risk of global outflows in essential, the RBI and the government cannot lose sight of domestic cost of funds. 

   

• The secret for the RBI may be to manage core inflation as it has remained sticky over last few months. Core inflation is a function of inflation expectations. The bet is that sustained hawkishness can bring down inflation expectations and the core inflation should follow. That may or may not work in practice and remains a policy risk.

The RBI has a tightrope to contend with. It finds itself in a quirky dilemma between falling wholesale inflation, sticky consumer inflation and growth on the edge. The next few months of inflation data and policy actions could hold the key.