July 2023 WPI inflation still in negative, but breaks falling trend

16 Aug 2023 , 10:05 AM

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 has been broken in the month of July 2023 as WPI contraction reduced from -4.12% in June 2023 to -1.36% in July 2023. In India, wholesale inflation (WPI) is normally announced a couple of days after the consumer inflation, or occasionally on the same day (as in August 2023). The fall in WPI inflation in last 1 year has been much sharper.

In the month of June 2023, we saw consumer inflation bounce back from 4.25% to 4.81% on account of a bounce in food inflation caused by erratic rainfalls impacting the supply chains. In July 2023, the CPI inflation bounced back further to a whopping 7.55%. That also had its rub-of impact on WPI inflation, where the extent of contraction reduced sharply to -1.36%, although it still remains in the negative on a yoy basis. WPI inflation is an important data point as it normally acts as a lead indicator for consumer inflation. Since April 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 in July 2023.

Charting the course of WPI inflation over last 1 year

The month of July 2023 marked a break in trend. After 13 consecutive months of progressively lower wholesale inflation, the WPI inflation actually contracted less in July compared to June. From the peak of 16.63% in May 2022, WPI inflation had fallen all the way to -4.12% in June 2023. That is a sharp fall of 2,075 basis points in 13 months. However, that trend has been arrested in July, with WPI inflation at -1.36%. 

The impact of 250 bps rate hike has been a lot more prominent on the WPI inflation; although it had also showed up on retail inflation till June 2023, albeit with a lag. One concern for the RBI would be that the latest spike in CPI inflation in July 2023 to 7.55%, takes it very close to the peak level of inflation of 7.79% in the first half of the previous year. Almost one year of efforts have been negated due to erratic monsoons this year. Here is a comparison of consumer and producer inflation over the last one year.

Month	WPI Inflation (%)	CPI Inflation (%)
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%
May-23	-3.48%	4.25%
Jun-23	-4.12%	4.81%
Jul-23	-1.36%	7.55%

Data Source: Office of the Economic Advisor

One may wonder why this dichotomy in WPI and CPI inflation? There is a reason for this dichotomy. WPI inflation is more sensitive 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 does get transmitted to CPI inflation with a time lag, through the impact on consumer spending. 

However, the eventual impact on CPI inflation tends to be smaller and much smoother over time. There is one more difference in terms of the composition of CPI inflation and WPI inflation. While the food basket dominates the CPI inflation calculation, it is manufacturing that dominates the WPI inflation basket. WPI is producer inflation after all, with implications for costs.

WPI inflation negative, but moderates to -1.36% in July 2023

Before we delve into the WPI numbers, here is a quick take on the composition of WPI inflation. It 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	Jul-23 WPI	Jun-23 WPI	May-23 WPI
Primary Articles	0.2262	7.57%	-2.87%	1.90%
Fuel & Power	0.1315	-12.79%	-12.63%	-9.17%
Manufactured Products	0.6423	-2.51%	-2.71%	-3.03%
WPI Inflation	1.0000	-1.36%	-4.12%	-3.61%
Food Basket	0.2438	7.75%	-1.24%	-1.54%

Data Source: Office of the Economic Advisor

What explains the negative WPI inflation moderating from -4.12% in June 2023 to -1.36% in July 2023? In one word, the answer is food and food products. Even in CPI inflation, the July number got impacted by the sharp spike in food inflation, which jumped to 11.55%, taking the overall CPI inflation to 7.44% for July 2023.

 A similar story has played out in WPI inflation also. The WPI inflation has moderated to -1.36% due to the primary articles inflation spiking to 7.57% in July. The food story is also ratified when we look at the food basket, which is up 7.75% in July 2023, causing most of the negative inflation moderation in July 2023. This is significant as it is the first time after 13 months that the trend of falling WPI inflation has been arrested.

What moved the WPI inflation in July 2023

Even if you looked at the WPI basket in the last 2 months, it was evident that agricultural items were causing most of the positive pressure on inflation while fuel was keeping WPI inflation in the negative. Of course, till the previous month, 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. 

Food inflation has been rising due to the delayed monsoons and that is showing its impact on the food basket. It has impacted food prices in the form of drought fears and delayed sowing initially, but later the deluge in some parts also created logistic problems. So, no prizes for guessing! Most of the positive WPI inflation contributors are from the food basket and only a handful from the manufacturing basket. While manufacturing inflation is still in negative, the momentum is slowing and that is indicating signs of WPI inflation bottoming out. That trend has already played out in July 2023.

Commodity	WPI Inflation	Commodity	WPI Inflation
Vegetables	62.12%	Potatoes	-24.40%
Pulses	9.59%	Crude Petroleum	-22.83%
Paddy	9.03%	Vegetable Oil and fats	-22.60%
Cereals	8.31%	LPG	-20.69%
Milk	8.15%	HSD	-18.95%
Wheat	8.01%	Petrol	-13.48%
Onions	7.13%	Oil Seeds	-9.61%
Minerals	5.21%	Textiles	-8.96%
Tobacco Products	3.38%	Paper & Paper Products	-8.29%
Beverages	2.42%	Chemical Products	-7.10%

Data Source: Office of the Economic Advisor

The story of the WPI inflation is now distinct divided into two sides of the coin. On the left side, it is the food product and some minerals that are driving most of the moderation in negative inflation in July. However, if you look at the manufacturing and fuel basket, the inflation is still well in the negative. The expectation is that once the food inflation issue moderates, then you could see the WPI inflation once again falling, but it is still too early to project how WPI inflation will pan out. 

With the base effect largely neutralized now, it is more about the food price spike. Too much of fall in WPI inflation is never a good sign as it shows unremunerative prices. Falling WPI inflation helps up to a point. Beyond that point, the falling WPI inflation can actually be counterproductive. That is something policy makers must be wary about when deciding on the policy response.

A quick look at the high frequency MOM WPI inflation 

While WPI inflation is normally presented yoy, the DIPP also presents high frequency MOM picture. Even the Bureau of Labour Statistics (BLS) in the US presents an annual change picture and a high frequency picture to capture short term trends. This is useful as MOM inflation is less vulnerable to long term base effect. Here is what we read from the MOM WPI inflation data for July 2023.

• For July 2023, MOM WPI inflation has bounced back sharply to 1.95%. MOM WPI inflation has been in negative zone in 2 out of the last 3 months. This is once again showing that negative inflation maybe bottoming out.

   

• July 2023 saw negative MOM inflation in fuel and manufactured products. However, the MOM inflation for primary articles and the food index stayed sharply in the positive; with the picture being almost similar in the MOM and YOY inflation stories.

For July 2023, the MOM inflation underlines the inference that negative inflation may be about to bottom out, or may have even bottomed out. We could see headline WPI inflation also bounce back into positive; if indications from MOM inflation are anything to go by.

Will the RBI act on repo rates after the WPI data?

The RBI normally relies on consumer inflation to take a view on interest rates or repo rates. However, in a scenario where the consumer inflation did not fall in sync with rising rates, RBI based its judgement on WPI inflation. In retrospect, the RBI was right and the retail inflation did follow the trend set by WPI inflation. However, the spike in inflation once again raises the million dollar question. Did the RBI move too soon in trying to call a pause on rates and would it have to now hike rates to compensate for the spike in inflation?

It must be remembered that the inflation pause was called in April to help Indian companies reduce their cost of funds and improve their financial performance. After all, when repo rates are high, it impacts cost of funds even for the bluest of blue chip corporates. In the last 2 quarters, Indian companies surely benefited from the pause. If one looks at the corporate results of Q4FY23 and Q1FY24, the sharp fall in WPI inflation had a very positive impact on the gross profit margins of Indian companies. However, the real question is; with CPI inflation bouncing and WPI food inflation also facing pressure, will the RBI return to its hawkish ways. The next policy is in October, but RBI may not want to wait till then.

It is time for the RBI to make some hard choices between moderating wholesale inflation, sticky core inflation, uncertain growth, and hawkishness of global central banks. For now, the RBI has called a halt on rates but with the latest spike in inflation, the real rate advantage that India had, has been neutralized. RBI would be wary of that. Of one combines the data from CPI and WPI inflation, the RBI has reasons to hike rates in October, or perhaps, even earlier than that. The moderation of WPI inflation in July 2023 from -4.12% to -1.36% will only make that choice simpler.