WPI inflation bounces to 1.84% as food basket plays truant

15 Oct 2024 , 03:38 PM

WHAT WE READ FROM THE WPI INFLATION 6-MONTH TREND?

One effective method to understand WPI inflation trends is by looking at a time series data. Here is how WPI inflation evolved over last 6 months between April and September 2024.

• Between April 2024 and September 2024, the overall WPI headline inflation moved from 1.19% to 1.84%; after touching a high of 3.43% in the month of June 2024.
• Let us first look at the primary basket. The inflation in the primary basket is higher on a 6-month basis; having risen from 5.23% to 6.59% between April and September 2024. In fact, inflation in the primary basket peaked at 9.21% in June but fell to 2.42% in August 2024, before spiking in September.
• The good news is that within the primary basket, the food basket has shown a relatively flat trend on a 6-month basis. Between April and June 2024, food inflation spiked from 8.07% to 11.14%; but since fell to 3.12% in August, before sharply rebounding back to 11.53% in September 2024. In fact, September 2024 wholesale food inflation is the highest level in the last 6 months.
• Let us look at the break-down of the food basket. Between April 2024 and September 2024, the food inflation increased from 8.07% to 11.53%. In fact, there were a number of sticky candidates in the food basket. For instance, between April and September 2024, vegetables inflation surged from 23.60% to 48.73%, potatoes inflation inched up from 71.97% to 78.13% while onions were up from 59.20% to 78.82%. Fruits also bounced from negative to positive. Cereals, pulses, and the high protein basket actually saw a fall in wholesale inflation in this period.
• Let us now move to the trend in the fuel basket. Between April 2024 and September 2024, the fuel and power index moved deeper into the negative zone from –0.85% to a lower level of -4.05%, with energy deflation being the sole saving grace for the WPI inflation basket. The bounce in price was most pronounced in LPG.
• Let us move to the trend in the manufacturing basket. Between April 2024 and September 2024, the manufactured products inflation has turned around from -0.14% to 1.00%. This spike in manufacturing inflation is indicative of the gradual rise in the cost of inputs, and that has implications for cost of production. High cost of funds is also one reason. However, compared to August, the wholesale manufacturing inflation is lower despite the trade constraints imposed by the geopolitical crisis in West Asia.
• It must be noted here that the manufacturing basket has the highest weightage of 64.23% in the WPI calculation. Within the manufacturing basket, the sectors that saw rise in prices over last 6 months were food products, beverages, textiles, leather, wood products, paper products, chemicals, pharmaceuticals, and rubber products . The sectors that saw fall in prices in this 6 months period were tobacco products, Wearing Apparel, metallic products, cement, lime, plaster, basic metals, and semi-finished steel.

The last 11 months since November 2023 saw WPI inflation stay in the positive zone and even touch a 16-month high in June at 3.43%. However, WPI inflation has tapered in July and August and that is good news for manufacturing sector.

SEP-24 WPI INFLATION SURGES FURTHER TO 1.84%

The wholesale price index (WPI) inflation for September 2024 spiked from 1.31% to 1.84%. It almost neutralized the gains of the previous two months when the WPI inflation had eased from a high of 3.43% to 1.31%; a fall of 212 basis points. In the month of June 2024, the WPI inflation had touched a 16-month high of 3.36% (later revised higher to 3.43%). However, like in July, even in August 2024 a higher base had helped WPI inflation to inch lower. However, that benefit was not available in September, as the inflation spiked despite the year-ago inflation moving up between August and September 2023. That means; the actual impact on inflation in September would have been much larger than what is evidenced by the numbers. WPI inflation was persistently in the negative between April 2023 and October 2023. However, since November 2023, it has been in positive territory.

If you look back at 2024, between February 2024 and June 2024, the WPI inflation was persistently higher in each successive month and had surged in the process from 0.20% to 3.43%. In early 2024, the surge in WPI inflation happened due to a spike in the food component of WPI inflation while the manufacturing inflation had turned around from negative to positive. In September 2024, the big relief for WPI inflation came from the fuel basket with wholesale fuel deflation visible. However, even as manufacturing was marginally lower, the spike came from food inflation, which surged sharply. One must remember that year 2024 had seen a robust monsoon at 107% of long period average. That should ensure the taming of inflation once the supplies hit the mandis. However, food has been the problem factor this time; in retail and wholesale inflation.

WPI INFLATION HIGHER, DESPITE HIGHER BASE EFFECT

The table below captures the trend of CPI inflation and WPI inflation over the last one year. These are yoy numbers as reported each month; with revisions.

Month	WPI Inflation (%)	CPI Inflation (%)
Aug-23	-0.46%	6.83%
Sep-23	-0.07%	5.02%
Oct-23	-0.26%	4.87%
Nov-23	0.39%	5.55%
Dec-23	0.86%	5.69%
Jan-24	0.33%	5.10%
Feb-24	0.20%	5.09%
Mar-24	0.26%	4.85%
Apr-24	1.19%	4.83%
May-24	2.74%	4.80%
Jun-24	3.43%	5.08%
Jul-24	2.10%	3.60%
Aug-24	1.31%	3.65%
Sep-24	1.84%	5.49%

Data Source: Office of the Economic Advisor

The monthly WPI data for the last one year demonstrates that WPI inflation turned around to positive in November 2023 after being negative for 7 months in a row from April 2023 to October 2023. WPI inflation has been persistently in the positive since November 2023. During this period, WPI inflation touched a 16-month high of 3.43% in June 2024. There is a more critical base effect at play in this entire story; but in September 2024, the prices rose despite the base effect. Here is why. Between August 2023 and September 2023, the base WPI inflation deepened actually hardened further from -0.46% up to -0.07%. That should have helped WPI inflation to flatten or fall in September 2024. However, the fact that the WPI inflation in September has surged, despite base effect, only goes to show that the actual impact of the inflation in September is, perhaps, a lot deeper than visible.

Last year in June 2023, the WPI inflation had bottomed out at -4.18% before gradually rising and getting back into positive territory. That base advantage is likely to last for just another month and time is really running out. Let us now turn to revisions of previous WPI data, which is normally done when new data points emerge. The final WPI inflation for July 2024 has been revised upwards by 6 basis points from 2.04% to 2.10%. The real reason for caution is that manufacturing inflation is now visible at several points.

WPI INFLATION (YOY) SHIFTS IN SEPTEMBER 2024

Here is a quick snap of the break-up of WPI inflation and its 3 major components viz. primary products basket, fuel & power basket, and the manufacturing products basket for the last 3 months in a row. Manufacturing has the highest weightage of 64.23%.

Commodity Set	Weight	Sep-24 WPI	Aug-24 WPI	Jul-24 WPI
Primary Articles	0.2262	6.59%	2.42%	3.18%
Fuel & Power	0.1315	-4.05%	-0.67%	1.93%
Manufactured Products	0.6423	1.00%	1.22%	1.58%
WPI Inflation	1.0000	1.84%	1.31%	2.10%
Food Basket	0.2438	9.47%	3.26%	3.60%

Data Source: Office of the Economic Advisor

Here are some of the key takeaways from the above table in terms of the 3-month yoy WPI inflation trend.

• The headline WPI inflation on a yoy basis at 1.84% is the net result of two contrasting trends. The primary basket spiked from 2.42% to 6.59% (with its component food basket doing the honours rising from 3.26% to 9.47%). However, this has been largely neutralized by the sharp fall in the oil basket which dipped from -0.67% to -4.05%. Manufacturing also tapered in the month.
• Let us first look at the fuel & power basket in greater detail. Fuel & Power wholesale inflation has deeper gone down from -0.67% to -4.05%. This is largely due to the sobering of global crude oil prices from $90/bbl to $78/bbl on supply glut concerns.
• Even the all-important manufacturing inflation has gone down from 1.58% to 1.00% in the last 3 months, clearly hinting at some sobering of producer inflation and manufacturing costs for Indian corporates. That will eventually translate into lower CPI.

HIGH FREQUENCY WPI INFLATION SHIFTS IN SEPTEMBER 2024

The yoy inflation above is vulnerable to the base effect. One alternative is to look at the high frequency MOM WPI inflation; which captures short-term trends more effectively.

Commodity Set	Weight	Sep-24 WPI	Aug-24 WPI	Jul-24 WPI
Primary Articles	0.2262	0.41%	-1.47%	2.86%
Fuel & Power	0.1315	-0.81%	-0.07%	0.88%
Manufactured Products	0.6423	0.14%	–0.07%	-0.21%
WPI Inflation	1.0000	0.06%	-0.52%	0.84%
Food Basket	0.2438	1.09%	-1.18%	2.52%

Data Source: Office of the Economic Advisor

Let us quickly look at how the MOM WPI inflation provides better insights into the short term trends in WPI inflation. Here is a summary.

• The primary articles with a weight of 22.6% in WPI basket, increased by 0.41% on MOM basis in September 2024. The items that saw an MOM increase included minerals (+1.83%), non-food articles (+1.31%) and food articles (+0.86%) for September 2024. In the primary basket; crude petroleum and natural gas was down -5.74% in September on an MOM basis. Let us turn to fuel and power.
• Fuel & Power with a weight of 13.15% declined by 0.81% MOM in September 2024. Items in the basket that increased included electricity (+1.34%). On the other hand, the price of mineral oils decreased by -1.72% on an MOM basis. The coal price index remained constant in September 2024. Let us finally turn to manufacturing.
• Manufactured Products with a weight of 64.23% increased by a nominal 0.14% in September on an MOM basis. Out of the 22 groups for manufactured products, a total of 10 groups witnessed an increase in prices, 9 groups witnessed a decrease in prices, and 3 groups witnessed no change in prices. Some of the key products that saw an increase in prices MOM include the manufacture of food products, other manufacturing, non-metallic mineral products, computers, electronic and optical products, wearing apparel etc. Among the groups in the manufacturing basket that witnessed an MOM decrease in prices included the manufacture of basic metals, textiles, motor vehicles, trailers, semi-trailers, chemicals, chemical products, fabricated metal products etc.

Clearly, the positive pressure is visible on the food basket in the very short run too.

WPI BASKET – BIG SWING FACTORS IN SEPTEMBER 2024

What do we mean by swing factors? These swing factor are the drivers that actually trigger the shift in the major index. It is not just about weightage, but about the extent of the movement and the overall impact on WPI inflation due to direct and indirect externalities. The table below captures the Swing factors in WPI basket on the upside and on the downside. The left hand side (LHS) looks at positive drivers; while right hand side (RHS) looks at negative drivers for WPI inflation. All shifts are on a yoy basis.

Commodity	WPI Inflation	Commodity	WPI Inflation
Onions	78.82%	Crude Petroleum	-16.78%
Potatoes	78.13%	Crude & natural gas	-13.04%
Vegetables	48.73%	Petrol	-7.47%
LPG	13.18%	Cement, Lime, Plaster	-6.55%
Pulses	12.99%	High Speed Diesel (HSD)	-5.33%
Fruits	12.17%	Semi-finished Steel	-3.86%
Vegetable oils & fats	10.51%	Non-metallic minerals	-3.41%
Cereals	8.08%	Basic Metals	-3.15%
Paddy	8.07%	Fabricated Metal Products	-2.15%
Wheat	7.60%	Oil Seeds	-1.02%

Data Source: Office of the Economic Advisor

The story of the WPI inflation is now divided into 2 parts. On the left hand side (LHS) are the products with positive WPI inflation ; that are driving the yoy WPI inflation higher. Not surprisingly, most of the pressure on WPI inflation is coming from food product basket or the agricultural basket. In fact, 8 out of the 10 swing products are from the agricultural and food basket. Of the remaining 2,  LPG and vegetable oils are part of the energy and manufacturing basket respectively. What about the commodities putting downward pressure on the WPI inflation? Out of the 10 top negative swing drivers of WPI inflation, only 1 is an agricultural product and 4 from the energy basket. The remaining 6 are from the manufacturing basket. Most of the downward pressure on WPI inflation this month came from the fuel basket, and not so much from the manufacturing basket.

OUTLOOK FOR FISCAL FY25 WPI INFLATION?

For FY25, we now have 6 months of WPI data. That would give a rough idea of the full-year extrapolation, although the overall picture is still evolving. For the first 6 months of FY25, the WPI inflation stands at 2.10%, compared to -1.74% in the corresponding first 6 months of FY24. Clearly, the comparable WPI inflation is 384 bps higher compared to the previous financial year and that is not too surprising, since the shift from negative WPI inflation to positive WPI inflation happened only effective from November 2023. However, some basic insights are already there and let us look at how the distribution looks like. For FY25 (6 months data), the cumulative WPI inflation stands at 2.10%. The real upward pressure on WPI inflation in FY25 is coming from  the primary basket, which has moved up from 2.70% to 5.60% on yoy basis. Both food and non-food articles have contributed to a spike in primary inflation in FY25, although non-food articles in the primary basket remained in negative territory, despite the bounce.

Fuel & Power inflation for FY25 has bounced sharply from -7.35% to -0.39% on yoy basis, but the real signs of trouble are visible in the manufacturing basket. Here is why. For FY25 till date (Apr-Sep), manufacturing basket inflation has spiked from -2.38% to 1.02%; an increase of 340 bps yoy. That means cost-push inflation could be real in FY25 and that is an important cue for RBI. One way the RBI could look at this situation would be that the RBI can help out corporates amidst rising manufacturing costs by cutting the interest rates. However, that may be optimistic with inflation still quite elevated.