September 2023 WPI inflation hardens to -0.26%; stays in negative

17 Oct 2023 , 09:57 AM

It is almost like a paradox of sorts. WPI inflation is at 6-month high but it continues to remain in the negative, albeit marginally. The month of September 2023 saw the WPI inflation coming in at -0.26%. it hardened in a month when the CPI inflation actually softened sharply from 6.83% to 5.02%. However, that is a different ball game, since CPI inflation focuses largely on food basket while the WPI inflation focuses more on the manufacturing basket. The falling trend of WPI inflation has been broken in the month of July 2023 after bottoming out at -4.12% in June 2023. It later hardened to -1.36% in July 2023, -0.52% in August 2023, and how it has hardened further to -0.26% in September 2023. In India, the wholesale inflation (WPI) is announced a couple of days after the consumer inflation. The WPI inflation was expected to creep into positive in September but that was not the case.

Between May and July 2023, we saw consumer inflation (CPI) bounce from 4.25% to 4.81% and then to 7.44%. However, the CPI inflation tapered to 6.83% in August 2023 and further to 5.02% in September 2023. The spike in CPI inflation was led by food items and the trend is almost similar in WPI inflation also, although the overall WPI inflation remains in the negative due to a predominance of manufactured products in the WPI inflation basket. WPI inflation has been gradually moving towards the zero mark and experts do believe that WPI inflation should be well into the positive by December 2023, when the full impact of the oil price spike starts getting factored into the inflation reading. Since May 2023, we have been underlining the argument that the fall in WPI inflation may not sustain further due to pressure on high frequency data. That gas been the case for WPI since July 2023.

How WPI inflation panned out in last 1 year

It may be recollected that July 2023 marked a break in trend of falling WPI inflation, and the months of August and September 2023 have only accentuated that trend. After 13 consecutive months of progressively lower wholesale inflation, the WPI inflation contracted less in July compared to June. The full stretch of the WPI fall is quite illustrative. From the peak of 16.63% in May 2022, WPI inflation had fallen all the way to -4.12% in June 2023. However, from the lows of June 2023, WPI inflation has progressively bounced to  -1.36%, -0.52%, and -0.26% respectively in the months of July, August, and September respectively. 

One thing you must remember is that the impact of any RBI rate hike is immediate and pronounced on the WPI. For instance, the 250 bps rate hike by the RBI between May 2022 and February 2023 had a lagged impact on WPI inflation, but the overall fall in WPI inflation from point to point was more than 2,000 basis points. That is typically shows how the CPI inflation and WPI inflation diverge in the Indian context. The table below captures a time series comparison of consumer and producer inflation over the last one year.

Month	WPI Inflation (%)	CPI Inflation (%)
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	-0.79%	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%

Data Source: Office of the Economic Advisor

The dichotomy is sharp and discernible and the million dollar question is; why does this dichotomy arise in the first place. There are 2 reasons for this dichotomy. WPI inflation is more sensitive to macro policy changes and hence the impact of any rate hike is immediately visible in producer prices and hence on WPI inflation. We saw this in the Indian context and we also saw that the impact is magnified; 2,000 points fall for 250 bps hike in rates. 

The dichotomy between the trend of the CPI inflation and WPI inflation has also to do with the composition. While CPI inflation is biased towards the food basket with a weightage of 45, in the case of WPI, it is the manufacturing basket that has a weightage of nearly 65%. Since WPI inflation veers towards the manufacturing goods basket, the relationship between WPI and CPI inflation is not immediate but transmits with a time lag. The impact does eventually get transmitted to CPI inflation through consumer spending. However, the eventual impact on CPI inflation tends to be smaller and also smoother.

Sep-23 WPI inflation negative, but moderates further to -0.26%

WPI inflation basket 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%. In the last 13 months, the sharp fall in manufacturing prices 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). Check the table below for the 3-month trend.

Commodity Set	Weight	Sep-23 WPI	Aug-23 WPI	Jul-23 WPI
Primary Articles	0.2262	3.70%	6.34%	8.24%
Fuel & Power	0.1315	-3.35%	-6.03%	-12.73%
Manufactured Products	0.6423	-1.34%	-2.37%	-2.58%
WPI Inflation	1.0000	-0.26%	-0.52%	-1.23%
Food Basket	0.2438	1.54%	5.62%	8.32%

Data Source: Office of the Economic Advisor

What explains the negative WPI inflation moderating from -4.12% in June 2023 to -0.26% in September 2023? In one word, the answer is food and food products. Even in CPI inflation, the recent inflation readings got impacted by the spike in food inflation. Food prices have an impact on primary and on secondary articles. However, the real point is that the impact of higher crude oil price is still not too evident since petrol and diesel prices are largely administered in India.

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, the extent of impact of food on WPI inflation has been reducing consistently. 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. 

However, even the inflation in manufactured products appears to be easing. For now, the WPI inflation is being pulled up by food inflation and that is hardly surprising. 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. A lot will now depend on the Rabi harvest towards the end of the year. The table below captures the upward and pressures on WPI inflation at a granular product level.

Commodity	WPI Inflation	Commodity	WPI Inflation
Onions	55.05%	Potatoes	-25.24%
Pulses	17.69%	Vegetable Oil and fats	-17.22%
Crude Oil	15.62%	LPG	-17.11%
Minerals	10.29%	Vegetables	-15.00%
Paddy	8.97%	High Speed Diesel (HSD)	-11.02%
Milk	8.58%	Paper Products	-9.99%
Cereals	7.28%	Textiles	-7.13%
Wheat	6.33%	Chemical Products	-6.71%
Fruits	5.96%	Oil Seeds	-5.25%
Tobacco Products	5.29%	Semi-Finished Steel	-3.56%

Data Source: Office of the Economic Advisor

The story of the WPI inflation is now divided into two distinct narratives. On the left side, it is the food product and some global commodities that are exerting the positive pressure on the WPI basket. These items on the left side are driving most of the moderation in negative inflation between July and September 2023. In addition, some of the export oriented manufactured output like tobacco products pulling up WPI inflation. However, if you look at the manufacturing and fuel basket, the inflation is still well in the negative and also rather stable. That is because oil is enjoying the base effect while manufacturing companies are still reaping the substantial benefits of the fall in commodity prices globally. 

A word of caution here. While higher WPI inflation is not good from a cost of production perspective, even negative inflation is not too encouraging. It shows unremunerative prices being realized by the producers. To that extent, it is good that the fall in WPI inflation has been moderating for the last 4 months. Falling WPI inflation helps up to a point. Beyond that point, falling WPI inflation is counterproductive. That is something policy makers always keep in mind when they react to inflation readings.

High frequency WPI sees maximum pressure from energy

While WPI inflation is normally presented on yoy basis, the DIPP also presents high frequency MOM picture. For September, the high frequency inflation would be September over August 2023. While the yoy figure captures the annual change picture, the MOM high frequency picture captures short term trends and the short term momentum of wholesale inflation. This is useful as MOM inflation is less vulnerable to long term base effect. Here is our reading from the MOM inflation data for September 2023.

• For September 2023, MOM WPI inflation turned negative at 0.59%, although there have been revisions to previous estimates also. MOM WPI inflation has been in negative zone in 3 out of the last 6 months, giving out a clear indication that the WPI inflation may have bottomed out but longer negative WPI inflation cannot be ruled out.

   

• September 2023 saw a sharp spike in MOM inflation in fuel to 2.34%, the second consecutive month of positive MOM fuel inflation. Clearly, the fuel price pressure is visible here. It also shows the pressure that fuel prices are exerting on short term WPI inflation. The higher fuel prices have strong externalities and that cannot be wished away. This is evident from the positive twist to manufacturing inflation MOM in the month of August 2023 and its sustenance in September at 0.36%.

August 2023 underscores the message of July 2023 and the MOM inflation only reiterates the message that WPI inflation may have well and truly bottomed out. However, it also indicates that the golden period of falling manufacturing input costs may also be over and the RBI would 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. It was expected to happen this month, but did not. However, while downside risks to inflation are still there, a bounce to positive would not only be logical but also positive for India Inc.