November 2023 WPI inflation turns to positive after 7 months

17 Dec 2023 , 12:51 PM

WPI inflation finally turns back into positive territory

There is a famous saying in economies that “If inflation is unjust, then deflation is inexpedient. Of the two, perhaps, deflation is worst.” What is so bad about falling prices? For one, when prices fall, it means that there is the lack of confidence in the economy and a fear about the economic future. The situation gets worse if the inflation that we talking about is not consumer inflation but wholesale inflation. It is normally, the WPI inflation that acts as the lead indicator of the health of industrial companies as it is an indication of the prices that the manufacturing sector is getting for its products. 

By default, wholesale inflation (measured by the wholesale price index or WPI) tends to be more volatile compared to consumer inflation. That is why it is normal to see the WPI inflation occasionally dip into negative zone. However, the problem arises if the WPI inflation stays in the negative zone for too long. It is an indication that the manufacturers, especially in the industrial sector, are not getting remunerative prices for their products. That only means that the manufacturing sector does not have incentive in the long run to expand output and grow the economy. For an economy that is so dependent on macro growth, that is not a good signal. That is why, the turnaround in WPI inflation into positive territory in the month of November 2023 is significant.

WPI inflation versus PPI inflation

One of the big shifts that India is planning on the WPI inflation front is changing the base year to make it more current and representative. But that is the simpler of the two changes. The bigger change that India is undertaking is the shift from WPI to PPI, as most of the other developed countries have already done. 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 nearly 60% of the Indian economy. However, the transition will happen in a phased manner so that the comparative anecdotal picture does not get distorted. Either ways, the PPI alone with a new base is likely to give a much better and more meaningful indication of the direction of the producer prices in India.

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 (%)
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	-0.79%	4.70%
May-23	-3.61%	4.25%
Jun-23	-4.18%	4.81%
Jul-23	-1.23%	7.44%
Aug-23	-0.46% (-0.52%)	6.83%
Sep-23	-0.07% (-0.26%)	5.02%
Oct-23	-0.52%	4.87%
Nov-23	0.26%	5.55%

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 after being in the negative zone for 7 months in a row since April 2023. November 2023 is the first month in FY24 when we have seen a positive WPI inflation figure and this can be largely attributed to the fall in the global commodity cycle which substantially helped to reduce the prices realized by commodity companies. 

If you look back at the data for previous months, there are two revisions and both indicate at WPI inflation pressures building up. For instance, the August 2023 WPI inflation estimate was revised higher by 6 basis points from -0.52% to -0.46%. At the same time, the September 2023 WPI inflation estimate was also revised higher by 19 basis points from -0.26% to -0.07%. This increases the likelihood that October inflation would have been higher than -0.52% while November 2023 inflation could also be higher than 0.26%. But we have to wait for the actual revisions to come in the coming months.

WPI inflation break-up – What does it tell us?

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	Nov-23 WPI	Oct-23 WPI	Sep-23 WPI
Primary Articles	0.2262	4.76%	1.82%	4.38%
Fuel & Power	0.1315	-4.61%	-2.47%	-3.35%
Manufactured Products	0.6423	-0.64%	-1.13%	-1.27%
WPI Inflation	1.0000	0.26%	-0.52%	-0.07%
Food Basket	0.2438	4.69%	1.07%	1.88%

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 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 1.82% to 4.76%. This trend was a lot more pronounced in the specific food basket which saw a spike from 1.07% to 4.69%. Even manufacturing inflation, although it still remained in the negative, saw an increase in prices, which can be construed as a good sign for manufacturers. 

But, the one real factor that has been putting downward pressure on WPI inflation is the fuel prices. In fact, fuel prices not only stayed in the negative but also deepened further into negative zone going from -2.47% in October 2023 to -4.61% in November 2023. This can be largely attributed to the sharp fall in crude oil prices in the Brent market. In the last two months, Brent crude has fallen from $96/bbl to $74/bbl, largely because the non-OPEC players like China, Canara, the US, Brazil, and Norway are starting to play a larger role in determining the direction of oil prices.

High frequency (MOM) perspective of WPI inflation – Why it matters

The yoy inflation we have been seeing till now is vulnerable to the base effect, which is the year ago data. A lot changes in a year, especially in the WPI basket where the changes are more short term in nature. That is why the WPI report by the Office of the Economic Advisor, also looks at MOM (high frequency) WPI inflation. Here is a 3-month summary.

Commodity Set	Weight	Nov-23 WPI	Oct-23 WPI	Sep-23 WPI
Primary Articles	0.2262	1.30%	0.49%	-3.52%
Fuel & Power	0.1315	0.78%	0.65%	2.68%
Manufactured Products	0.6423	0.07%	-0.07%	0.39%
WPI Inflation	1.0000	0.53%	0.20%	-0.46%
Food Basket	0.2438	1.95%	0.67%	-4.65%

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). The primary index for November 2023 stood at 1.30%. This will comprise of positive movement in prices of minerals (-0.41%) and food articles (2.62%) in November over October 2023. However, prices of Crude Petroleum and Natural Gas (-4.79%) as well as Non-food Articles (-0.24%) continued to put negative pressure on the primary goods basket. In short, it is the food products inflation that is pulling up WPI inflation into the positive zone.

   

• Let us turn to the MOM WPI movement of Fuel & Power. The index for this group saw an increase of 0.78% in November compared to October 2023. The upward pressure here came from prices of Electricity (+9.93%), which was partially neutralized by prices of mineral oils (-1.99%) in October 2023.

   

• Finally, we come to the all-important Manufactured Products category. This segment saw +0.39% growth on a MOM basis in November over October 2023. Out of the 22 categories of manufactured products tracked by the WPI manufacturing basket, 8 groups witnessed an increase in prices, 10 groups witnessed decrease in prices, while 4 groups remained unchanged. The price increases were led by food products, motor vehicles trailers & semi-trailers, and fabricated metal products. The groups that saw negative WPI inflation on MOM basis included basic metals, electrical equipment, textiles, other non-metallic mineral products, rubber, and plastic products.

The overall story was that most of the high frequency pressure came from food and primary products. While manufacturing prices also put pressure on the final WPI number, it was falling oil prices that actually neutralized WPI inflation to the current low levels.

What pushed up WPI inflation, and what pushed it down

Before we get 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 been about erratic monsoons and intermittent floods leading to lesser than expected Kharif output. Even the Rabi output is likely to be impacted as the winter monsoons are tepid and the reservoirs are not full like they used to be. In addition, the supply chain constraints caused by erratic weather have also caused delays in the Kharif output hitting the mandis. Not surprisingly, most of the pressure on WPI inflation is coming from food and food products. That is evident in the table below. The table below captures the upward and pressures on WPI inflation at a key product level.

Commodity	WPI Inflation	Commodity	WPI Inflation
Onions	101.24%	Potatoes	-27.22%
Pulses	21.64%	Vegetables / Animal oils & Fats	-18.43%
Minerals	10.78%	High Speed Diesel (HSD)	-13.07%
Paddy	10.44%	Crude Petroleum	-9.84%
Vegetables	10.44%	Paper & Paper Products	-8.28%
Fruits	8.37%	Oil Seeds	-7.16%
Cereals	8.18%	Chemicals & Chemical Products	-6.13%
Milk	7.95%	Semi-Finished Steel	-3.81%
Paddy	7.12%	Textiles	-3.52%
LPG	5.57%	Basic Metals	-1.54%

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 the food product and some global commodities 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 drivers of positive WPI inflation, 8 are agricultural and food products while only two are commodities, which shows the inordinate role that food is playing in pushing up the WPI inflation in India. The story is almost the same on the CPI inflation front, where also food has been the key driver of higher inflation. That is something for the RBI to ponder about since the combination of high WPI food inflation and high CPI food inflation shows that it is really a sticky structural problem.

What about the RHS of the above table, which includes the products that are depressing the WPI inflation? There is are 2 agricultural products viz. Potatoes and Oilseeds; and two products that represent minerals viz. diesel and crude petroleum. The rest of the products that are applying downward pressure on the WPI basket still belong to the manufacturing index, which has the biggest weightage of more than 64% in the WPI basket. As long as that remains under pressure, it may be tough for WPI inflation to scale to much higher levels. But, we need to wait and watch on that issue.

How will RBI interpret the November 2023 WPI inflation reading?

The RBI does not give too much direct weightage to the changes in WPI inflation since it tends to be more volatile compared to consumer inflation or CPI inflation. However, the RBI has always been 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 growth of the profitability of corporates. Even if that optically keeps inflation in check, it impacts the GDP growth in a more serious way.

In November, the WPI inflation turned into positive after being in the negative for 7 months in a row. However, RBI may not come to any conclusion of turnaround based on just one month data and would prefer to watch the trend for the next three to four months for a trend confirmation. It looks like WPI inflation has bottomed out and that is good news. RBI wilk factor that into its calculations, although it already looks like India has seen peak rates. RBI may prefer to buy growth, even at the cost of slightly higher inflation.