June 2023 WPI inflation dips further into negative at -4.12%

15 Jul 2023 , 03:09 PM

In India, wholesale inflation (WPI) is announced just a couple of days after the consumer inflation is put out. 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. The RBI inflation target is 4%, but in June 2023 the inflation actually diverged from that point. However, WPI inflation has continued to dip deeper into the negative. We had mentioned that WPI inflation normally acts as a lead indicator for consumer inflation and that has been largely on target. For the month of June 2023, WPI inflation dipped deeper into the negative zone at -4.12%; or you can say producer prices are contracting. 

Charting the course of WPI inflation in last 1 year

The month of June 2023 marks the 13th consecutive month of progressively lower wholesale inflation. From the peak of 16.63% in May 2022, WPI inflation has fallen 2,075 basis points to -4.12% in just 13 months between May 2022 and June 2023. 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; although it is also showing up on retail inflation with a lag. Against the 2,075 bps fall in WPI inflation from the peak, retail inflation is down just 398 basis points from the peak of April 2022. Retail inflation typically reacts with a lag, to shifts in interest rates while WPI is the lead indicator. Here is a comparison over last 1 year.

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

Data Source: Office of the Economic Advisor

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. The impact eventually gets 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. There is one more difference. While the food basket dominates the CPI inflation calculation, it is manufacturing that dominates the WPI inflation basket.

WPI inflation dips further to -4.12% in June 2023

WPI inflation is divided into 3 major segments. There are 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 followed by fuel inflation has played a key role in keeping WPI number in negative territory for the third month in a row. Food basket weight of 24.38% is partially carved out of primary articles (food crops) and partly out of manufactured products (food products).

Commodity Set	Weight	Jun-23 WPI	May-23 WPI	Apr-23 WPI
Primary Articles	0.2262	-2.87%	-1.79%	1.89%
Fuel & Power	0.1315	-12.63%	-9.17%	0.99%
Manufactured Products	0.6423	-2.71%	-2.97%	-2.28%
WPI Inflation	1.0000	-4.12%	-3.48%	-0.79%
Food Basket	0.2438	-1.24%	-1.59%	0.40%

Data Source: Office of the Economic Advisor

For the second month in a row, we can witness negative WPI inflation across all the categories viz. primary articles, food basket, fuel/power and manufactured products. The WPI inflation at -4.12% in June 2023 is the lowest level of WPI inflation since the year 2015, which was when the WPI inflation had last dipped below the -5% mark. One big factor in the lower WPI inflation is that energy inflation has finally come down sharply on account of a growing base. However, the intensity of fall is tapering in the case of the food basket and also in the case of manufactured products. That could imply that further downsides in WPI inflation from current levels would be limited.

What moved the WPI inflation in June 2023

The sharp fall in WPI inflation was across manufactured products, mining products, and fuel. However, food inflation has been rising due to the delayed monsoons and that is showing its impact on the food basket. 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. The maximum downside pressure came from the oil & gas space.

Commodity	WPI Inflation	Commodity	WPI Inflation
Pulses	9.21%	Crude Petroleum	-32.68%
Wheat	9.02%	Vegetable Oils	-28.77%
Milk	8.59%	LPG	-22.29%
Cereals	8.34%	Vegetables	-21.98%
Paddy	7.67%	Potatoes	-21.27%
Tobacco Products	5.55%	HSD	-18.59%
Minerals	4.12%	Petrol	-16.32%
Egg, Meat, Fish	2.74%	Oil Seeds	-14.39%
Pharmaceuticals	2.43%	Textiles	-9.51%
Wood   Products	2.18%	Paper Products	-7.38%

Data Source: Office of the Economic Advisor

The story of the WPI inflation is largely about energy products and to a lesser extent about select food products. Most of the positive boosters for the WPI inflation are coming from the agricultural products while the items that depress the WPI inflation are coming from energy products and the agricultural products. In a sense, the high base is a key reason for this sharply negative WPI inflation in June 2023. However, as stated earlier, the intensity of the fall in WPI inflation is slowing and that could be an indication that it may be close to bottoming out, if not at the very bottom already.

How did the high frequency MOM WPI inflation pan out?

While WPI inflation is normally presented as a yoy figure, 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 track high frequency trends in wholesale inflation. This is useful as it is less vulnerable to the long term base effect; especially in a volatile macro environment. That is when MOM inflation captures the story better. Here is what we read from the MOM WPI inflation data for June 2023.

• For June 2023, MOM WPI inflation stays in negative but improves from -0.99% to the level of -0.40%. MOM WPI inflation has been in negative zone in 2 out of the last 6 months. This is once again showing that negative inflation maybe bottoming out.

   

• June 2023 saw negative MOM inflation in fuel and manufactured products. However, the MOM inflation for primary articles and the food index stayed in the positive and that can be largely attributed to pressure on food prices on account of the late monsoons.

MOM numbers offer a good way to ratify the yoy WPI inflation trend and capture some the short term shifts in the data more accurately. In fact, the MOM inflation also underlines the inference from the yoy data that negative inflation may be about to bottom out and we could see WPI inflation bounce, although it would be largely due to the base effect.

Will the WPI inflation influence the RBI rate policy

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 was not falling in sync with rising rates, the RBI had to base its judgement on WPI inflation. That is what the RBI did when it announced a pause in rate hikes after February 2023. In retrospect, the RBI was right and the retail inflation did follow the example set by WPI inflation. With the WPI inflation bottoming out, the RBI may now focus more on CPI inflation once again.

The fall in wholesale inflation has also had an impact on the results of corporate India. Wholesale inflation is into negative zone for 3 months in a row and that has largely rubbed off in the form of lower input prices and wider profit margins in the fourth quarter of FY23. It remains to be seen if the Indian companies are able to build on that experience in the first quarter of FY24, especially a further build-up in the gross profit margins of Indian companies. 

Now, the RBI has to make hard choices between falling wholesale inflation, sticky core inflation, uncertain growth, and hawkishness of global central banks. For now, the RBI has called a halt on rates but further action may depend on what the other central banks like the Fed do. Will the WPI inflation staying in negative trigger rate cuts? That looks unlikely for now, but things do change fairly quick in any macro story.