May 2023 WPI inflation dips further into negative at -3.48%

15 Jun 2023 , 10:30 AM

In India, wholesale inflation (WPI) is announced just after consumer inflation. In the month of May 2023, we saw consumer inflation fall sharply to 4.25%, tantalizingly close to the RBI target of 4%. However, this was preceded by a consistently sharp fall in WPI inflation. We had mentioned that WPI inflation normally acts as a lead indicator for consumer inflation and that is actually turning out to be true. For the month of May 2023, WPI inflation dipped deeper into the negative zone at -3.48%; or you can say producer prices are contracting. 

A sharp fall in WPI inflation in last one year

Interestingly, the month of May 2023 marks the 12th consecutive month of progressively lower wholesale inflation. From the peak of 16.63% in May 2022, WPI inflation has fallen 2,011 basis points to -3.48% in just 12 months between May 2022 and May 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; but now it is starting to show on retail inflation also, albeit with a lag. Against the 2,011 bps fall in WPI inflation, retail inflation is down just 454 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.

Month	WPI Inflation (%)	CPI Inflation (%)
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%
Feb-23	3.85%	6.44%
Mar-23	1.34%	5.66%
Apr-23	-0.92%	4.70%
May-23	-3.48%	4.25%

Data Source: Office of the Economic Advisor (peak level is shaded)

WPI inflation is normally more sensitive and hence the impact of any rate hike is immediately visible in WPI inflation. The impact eventually gets transmitted to CPI inflation with a time lag, through the impact on consumer spending. Also, manufacturing data has the highest weightage in WPI inflation, where the impact is more immediate.

WPI inflation dives to -3.48% in May 2023

Overall WPI inflation is divided into 3 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 the WPI number in negative territory for the second month in a row. Food basket weight of 24.38% is partly carved out of primary articles (food crops) and partly out of manufactured products (food products).

Commodity Set	Weight	May-23 WPI	Apr-23 WPI	Mar-23 WPI
Primary Articles	0.2262	-1.49%	1.60%	2.52%
Fuel & Power	0.1315	-9.17%	0.93%	8.69%
Manufactured Products	0.6423	-2.97%	-2.42%	-0.70%
WPI Inflation	1.0000	-3.48%	-0.92%	1.41%
Food Basket	0.2438	-1.59%	0.17%	2.32%

Data Source: Office of the Economic Advisor

For the first time in the last few years, we are seeing negative WPI inflation across all the categories viz. primary articles, food basket, fuel/power and manufactured products. The WPI inflation at -3.48% in May 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. This month, the high base effect has had an impact across the board; on food, mining products, manufactured products, and energy.

What moved the WPI inflation in May 2023

The sharp fall in WPI inflation was across manufactured products, mining products, food products, agricultural products, and fuel. Manufacturing inflation has now been in the negative zone for the third month in a row. With a weightage of 64.2% in the overall WPI basket, manufacturing had an oversized impact in pulling down WPI inflation. Energy inflation dipped deep into negative zone on higher base effect combined with a sharp fall in the crude prices. Even food, mining and agricultural prices were not spared the fall.

Commodity	WPI Inflation	Commodity	WPI Inflation
Paddy	7.33%	Vegetable & Animal Oils	-29.54%
Cereals	6.89%	Crude Petroleum	-27.01%
Milk	6.83%	LPG	-24.35%
Minerals	6.80%	Vegetables	-20.12%
Wheat	6.15%	Potatoes	-18.71%
Tobacco Products	4.20%	HSD	-17.03%
Pharmaceuticals	2.88%	Oil Seeds	-15.65%
Beverages	2.02%	Petrol	-9.45%
Wood   Products	1.91%	Basic Metals	-9.17%
Wearing Apparel	1.77%	Textiles	-8.28%

Data Source: Office of the Economic Advisor

The story of the WPI inflation is largely about energy products and 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 agricultural products and energy products. In both the cases, the high base is a key reason for this sharply negative WPI inflation in May 2023. But the downward pressure exerted on WPI inflation is evident from the intensity of the products having negative WPI inflation in May 2023.

Fact checking on high frequency WPI inflation (MOM)

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 help track high frequency trends in wholesale inflation. That is useful to understand the changes in the short term since much of what is happening on WPI inflation is short term in nature. In a volatile macro environment, yoy inflation is vulnerable to base effect, so MOM inflation captures the scenario better. Here is what we read from the MOM WPI inflation data for May 2023.

• For May 2023, MOM WPI inflation has dipped into negative at -0.86%. MOM WPI inflation has been in negative zone in 3 out of the last 6 months, while in the remaining 3 months the WPI inflation was just about marginally positive.

   

• May 2023 offers a unique combination in that all the components of the WPI basket are manifesting negative WPI inflation on yoy basis and also on a high frequency MOM basis. That just accentuates the downward pressure exerted on WPI inflation.

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.

How WPI inflation influenced RBI and corporate numbers

On the face of it, the RBI normally relies on the 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 in April 2023. In retrospect, the RBI was right and the retail inflation did follow the example set by WPI inflation. To that extent, the RBI did rely on the WPI number for shifting from a hawkish to neutral approach.

Let us look at the more interesting aspect of how the fall in wholesale inflation has had an impact on the results of corporate India. Wholesale inflation is into negative zone and that has largely rubbed off into lower input prices and wider profit margins in the fourth quarter of FY23. That is evident in the Q4FY23 numbers and also in the full year FY23 numbers. Across industries, there has been a perceptible improvement in the gross profit margins largely due to the sharp fall in input costs. This has benefited companies across sectors.

Having said that, the RBI still has a fairly delicate balancing act to do. It must make hard choices between falling wholesale inflation, sticky core inflation, uncertain growth and rising rates pinching corporate bottom lines. For now, the RBI has only called a halt on rates and even the RBI governor has ruled out rate hikes. But, if the WPI inflation stays in the negative zone for longer, there will be a strong case for the RBI to start cutting rates. The question is, how soon would it happen?