October 2023 WPI inflation stays negative for seventh month in a row

16 Nov 2023 , 09:15 AM

Last month, in our September 2023 WPI inflation report, we had specifically stated that the WPI inflation was in the negative despite being at a 6-month high. However, the month of October saw a deepening of negative WPI inflation as it went from -0.26% to -0.52% in October over September. Ironically, this softening of WPI inflation is in sync with the softening of the CPI inflation, which also tapered from 5.02% in September 2023 to 4.87% in October 2023. However, CPI inflation and WPI inflation are a different ball game due to several reasons. Firstly, the CPI inflation largely focuses on food basket while the WPI inflation focuses more on the manufacturing basket. It is normally, the WPI inflation that is supposed to act as a lead indicator for CPI inflation, but it often behaves to the contrary too.

What is the big WPI inflation story for October 2023?

WPI inflation remains in the negative due to a predominance of manufactured products in the WPI inflation basket. WPI inflation had been progressively moving towards the zero mark, but October 2023 saw a deepening of negative inflation from -0.26% to -0.52%. What were the key triggers for the WPI inflation in India? The negative rate of inflation in October 2023 can be substantially attributed to the persistent fall in prices of chemicals and chemical products, electricity, textiles, basic metals, food products, paper, and paper products. In many cases, this is due to the glut of these products in the market as many of them are from the export intensive segment where the global demand has been under stress for some time now, as global companies tighten their belt. 

Picture of WPI inflation in the last one year

The table below captures the trend of CPI inflation and WPI inflation over the last one year.

Month	WPI Inflation (%)	CPI Inflation (%)
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	-0.79%	4.70%
May-23	-3.61%	4.25%
Jun-23	-4.18%	4.81%
Jul-23	-1.23%	7.44%
Aug-23	-0.52%	6.83%
Sep-23	-0.26%	5.02%
Oct-23	-0.52%	4.87%

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 been in the negative for 7 out of the last 12 months. In fact, in this fiscal FY24, the WPI inflation has been negative in all the months between April and October 2023. To understand this trend in WPI inflation, a quick look at the component wise break-up of WPI inflation should be useful input. The table below captures you inflation.

Commodity Set	Weight	Oct-23 WPI	Sep-23 WPI	Aug-23 WPI
Primary Articles	0.2262	1.82%	3.70%	6.73%
Fuel & Power	0.1315	-2.47%	-3.35%	-6.34%
Manufactured Products	0.6423	-1.13%	-1.34%	-2.30%
WPI Inflation	1.0000	-0.52%	-0.26%	-0.46%
Food Basket	0.2438	1.07%	1.54%	6.19%

Data Source: Office of the Economic Advisor

What is our quick reading of the yoy WPI inflation data above. Most of the negative pressure on WPI inflation in the month of October 2023 comes from primary articles which saw the WPI inflation level fall sharply from 3.70% to 1.82%. However, this deepening of negative inflation was halted by higher WPI inflation from fuel and manufacturing (albeit both in the negative). Over a 2 month period, the WPI inflation is almost at the same level, despite the food basket and primary basket falling sharply. That is largely due to fuel inflation and manufacturing inflation hardening over the last 2 months. That is the contrasting perspective of the components of yoy WPI inflation.

How about a high frequency (MOM) perspective of WPI inflation?

The yoy inflation we have been seeing till now is too vulnerable to the base effect, which is a year ago. A lot changes in a year. 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	Oct-23 WPI	Sep-23 WPI	Aug-23 WPI
Primary Articles	0.2262	1.15%	-4.15%	-0.73%
Fuel & Power	0.1315	0.65%	2.68%	2.54%
Manufactured Products	0.6423	0.00%	0.29%	0.29%
WPI Inflation	1.0000	0.40%	-0.66%	0.26%
Food Basket	0.2438	1.01%	-4.97%	-0.85%

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 includes the food basket partially. The primary index for October 2023 stood at 1.15%. This will comprise of positive movement in prices of minerals (7.81%) and food articles (1.33%) in October over September 2023. Which are the headers of primary basket that fell MOM? Prices of Crude Petroleum and Natural Gas (- 0.60%) as well as Non-food Articles (- 0.24%) fell in October 2023, compared to September 2023.

   

• Let us turn to the MOM WPI movement of Fuel & Power. The index for this group saw an increase of 0.65% in October compared to September 2023. The upward pressure here came from prices of Mineral Oils (+1.28%), while that was partially neutralized by prices of Electricity (-0.73%) in October 2023.

   

• Finally, we come to the all-important Manufactured Products category. This segment saw zero growth on a MOM basis. Out of the 22 categories of manufactured products tracked by the WPI manufacturing basket, 13 groups witnessed an increase in prices, 7 groups witnessed decrease in prices, while 2 groups remained unchanged. The price increases were led by food products, chemicals / chemical products, motor vehicles trailers & semi-trailers, textiles, and non-metallic minerals. The groups that saw negative WPI inflation on MOM basis included basic metals, fabricated metal products, rubber & plastic products, and other transport equipment.

The overall story was that most of the high frequency pressure came from food and primary products followed by oil & fuel, while manufacturing was largely flat. 

Food products deepen WPI inflation, crude eases

A cursory glance at the WPI basket in the last 3 months, would suggest that agricultural items were causing most of the positive pressure on inflation while fuel was keeping WPI inflation in the negative. However, negative fuel inflation is still quite misleading as prices continue to be largely administered in the real sense of the term. Post July 2023, fuel and manufacturing inflation continue to remain in negative while food inflation has bounced sharply into positive. One small shift in the latest month of October 2023 is that the positive drivers are still from the agri-space but negative drivers are from manufacturing space.

For now, the WPI inflation is being pulled up by food inflation and that is hardly surprising considering that supply chain issues are still at the core of the high levels of inflation seen in onions, pulses, paddy, milk, cereals, and fruits. After all, this was the year when the Kharif was tepid, rainfall was below average and the recent deluge in some places resulted in pressure on logistics of getting the food to the mandis on time. While the Rabi harvest season begun, a lot would predicate how the flows into the mandis shape up. The table below captures the upward and pressures on WPI inflation at a key product level.

Commodity	WPI Inflation	Commodity	WPI Inflation
Onions	62.60%	Potatoes	-29.27%
Pulses	19.43%	Vegetables	-21.04%
Minerals	12.20%	Vegetables / Animal oils & Fats	-17.89%
Paddy	9.39%	Paper & Paper Products	-9.10%
Milk	7.92%	High Speed Diesel (HSD)	-6.79%
Cereals	7.51%	Textiles	-5.47%
Fruits	6.27%	Crude Petroleum	-4.95%
Tobacco Products	6.09%	Semi-Finished Steel	-4.60%
Wheat	4.75%	LPG	-4.03%
Petrol	3.45%	Oil Seeds	-3.76%

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 moderation in negative inflation. However, the inflation has been weakening in several products, especially manufactured products, that are captured on the right hand side. Of course, agri output like potatoes and vegetables were the top items to see moderation in inflation in October 2023. Last month, the WPI inflation got very close to the zero mark, but this time it has gone deeper into the red from -0.26% to -0.52%.

There are two sides to the WPI inflation debate and it works both ways. While higher WPI inflation is not good from a cost of production perspective, even negative WPI inflation is not too encouraging. It hints at unremunerative prices being realized by the producers. To that extent, it is good that the fall in WPI inflation has been moderating in the last 4 months, despite the deepening in the current month. Falling WPI inflation helps up to a point. Beyond that point, falling WPI inflation is counterproductive.

How will the RBI interpret the latest WPI inflation data?

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 WPI inflation for two reasons. Firstly, very high WPI inflation eventually seeps into CPI inflation and that is not good news. Secondly, high levels of WPI inflation effectively mean that the corporates are struggling with higher cost of inputs and, therefore, lower operating margins. 

While the level of WPI inflation has been in the negative for 7 months in a row, it also gives a hint that the levels may have bottomed out. While the WPI inflation may continue to be in the negative for some more time, one message that comes out is that the golden period of falling manufacturing input costs may be over. That is something most of the Indian manufacturing companies and even service companies must be prepared for. RBI should keep this in mind while formulating its monetary policy. We could see headline WPI inflation eventually bounce back into positive; if indications from MOM inflation are anything to go by. While there are the distinct downside risks to WPI inflation getting back into positive territory, a bounce to positive would not only be logical but also positive for India Inc.