WPI inflation eases to 0.20% in February 2024

15 Mar 2024 , 12:00 PM

WPI inflation marginally lower at 0.20% in February 2024

For the fourth month in a row, the WPI inflation remained in positive territory. This comes after 7 consecutive months of negative WPI inflation between April and November 2023. In a sense, the WPI inflation acts as the lead indicator for CPI inflation since it reflects the producer prices, which eventually gets reflected in the form of consumer inflation. The common factor in both is the food and primary products, which are moving in tandem.

However, the one difference in the WPI inflation that is announced each month by the Office of the Economic Advisor is that it has a very large share of manufacturing inflation. Hence, the WPI inflation index also acts as a reliable barometer of the costs incurred by Indian corporates as well as the producer pricing realized by manufacturers. The gap between WPI and CPI also shows the efficiency of cost pass-through in the economy.

If high WPI inflation is bad, negative WPI inflation is worse

In the last 3 years we have seen wide variations in the WPI figure. While in 2021 and 2022, the WPI inflation had gone towards double digits, it had come down sharply with a tight monetary policy from early 2023 and was in the negative consistently from April 2023 till November 2023. The question is; what is the ideal WPI inflation. Obviously, too high levels of WPI inflation is not sustainable as it adds to the costs of industry substantially. Also, the high WPI inflation eventually translates into higher CPI inflation and hits consumer budgets in a big way. This eventually leads to higher inflation expectations too.

What about negative WPI inflation. That is also not healthy; in fact, it is a lot unhealthier compared to high levels of WPI inflation. Negative WPI inflation means that the producers are getting lower prices as compared to the previous year and that is normally not remunerative. Such a situation impacts the investment capacity of such companies and even forces them to cut costs and streamline operations. If negative WPI inflation continues for too long, it can also result in an industrial slowdown, which can have negative outcomes and even be the lead indicator for an overall slowdown in the economy overall.

How WPI and CPI journeyed in last 1 year

The table below captures the trend of CPI inflation and WPI inflation over the last one year. These are monthly numbers captured on a yoy basis.

Month	WPI Inflation (%)	CPI Inflation (%)
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%	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	0.27%	5.10%
Feb-24	0.20%	5.09%

Data Source: Office of the Economic Advisor

The monthly WPI data for the last one year indicates that WPI inflation finally turned around to positive in November 2023 after being in negative zone for 7 months in a row. However, after the spike in December, January and February have seen the WPI inflation sobering. This is on the back of fall in energy inflation and tapering of manufacturing inflation amidst falling input costs. However, food inflation component of the WPI has remained under pressure. Even withing primary basket, it is food that is driving prices higher.

Let us now turn to the revisions of previous WPI data, which is normally done when new data points emerge. Based on additional data points, the final WPI inflation for December 2023 has been revised upwards by 13 bps from 0.73% to 0.86%. This raises the possibility that the WPI inflation for January 2024 and February 2024 could also be revised higher when the respective revised numbers are published. The rolling correlation coefficient for the last 13 months period between CPI and WPI inflation stands at 0.4944, which is low correlation. However, the correlation may be higher if we consider the lag effect of WPI on CPI and adjust comparative periods accordingly. That may be for future debate.

Key drivers of WPI inflation (YOY) for February 2024

Here is a quick dekko at the break-up of WPI inflation, and a look at its 3 major components viz. primary products basket, fuel & power basket, and the manufacturing products basket. It is manufacturing that has the largest weightage of 64.23%.

Commodity Set	Weight	Feb-24 WPI	Jan-24 WPI	Dec-23 WPI
Primary Articles	0.2262	4.49%	3.84%	5.73%
Fuel & Power	0.1315	-1.59%	-0.51%	-1.39%
Manufactured Products	0.6423	-1.27%	-1.13%	-0.78%
WPI Inflation	1.0000	0.20%	0.27%	0.86%
Food Basket	0.2438	4.09%	3.79%	5.39%

Data Source: Office of the Economic Advisor

What do we decipher from the trends of the WPI components. In the last few months since November 2023; the bounce in WPI inflation and the fall in WPI inflation have been a direct outcome of the food basket. That is the basket that has shown a high level of beta with the overall WPI inflation. However, in the current month of February 2024, the WPI inflation has trended lower, despite higher food inflation pressures. That is because; lower fuel inflation and lower manufacturing inflation have more than compensated for higher food inflation.

Between November 2023 and January 2024, primary articles (comprising of mining and food cropping) saw WPI inflation tapering from 5.73% to 4.49%. In the same period, fuel inflation went lower from -1.39% to -1.59%, while manufacturing basket also went lower from -0.78% to -1.27% in the same period. Here it must be noted that low fuel inflation is largely an outcome of the OMCs holding the prices since May 2022. However, now that prices of petrol and diesel have been cut by ₹2 per litre, we could see WPI inflation tapering again.

High frequency (MOM) WPI inflation turns positive in February

The yoy inflation we have seen till now is vulnerable to the base effect. That is why the high frequency MOM WPI data captures short-term trends best. Here is a quick look at how the MOM WPI evolved in the last 3 months.

Commodity Set	Weight	Feb-24 WPI	Jan-24 WPI	Dec-23 WPI
Primary Articles	0.2262	0.22%	-0.98%	-2.56%
Fuel & Power	0.1315	0.19%	-0.64%	-0.26%
Manufactured Products	0.6423	0.00%	-0.14%	-0.14%
WPI Inflation	1.0000	0.07%	-0.46%	-0.85%
Food Basket	0.2438	0.17%	-1.06%	-2.18%

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 and partially the minerals mining basket). Primary index for February 2024 stood at +0.22%. The price increase was seen in minerals (2.80%), crude petroleum & natural gas (2.18%) and food articles (0.26%). However, the other key items were in the negative. For instance, non-food articles fell by -1.73%, for the month of February 2024; keeping the primary basket inflation tepid.
• Let us turn to the MOM WPI movement of Fuel & Power. The index for this group saw increase of +0.19% in February 2024. The upward pressure here predominantly came from prices of Electricity (+0.77%) and mineral oils (+0.06%); which was partially neutralized by a fall in the prices of coal (-0.15%).
• Finally, we come to the all-important Manufactured Products category. This segment was absolutely flat on MOM basis in February 2024 over January 2024. Out of the 22 categories of manufactured products tracked by the WPI manufacturing basket, 10 groups witnessed an increase in prices, 8 groups witnessed decrease in prices and 4 group remained neutral. The price increases were led by textiles, pharmaceuticals, medicinal products, chemical products, motor vehicles, trailers, electrical equipment, and tobacco products. The groups that saw negative WPI inflation on MOM basis included basic metals, mineral products, fabricated metal products, rubber & plastic products, print and media products etc.

High frequency WPI inflation gives a quick picture of where the short term trends and predicated towards, and in this case, it looks like the trend is down and could even dip into negative once the recent price cut in petrol and diesel is considered.

Swing factors in the WPI basket in February 2024

Swing factor are the key drivers of the WPI inflation (both on the upside and the downside. For instance, since July, there has been pressure on the food basket on account of erratic monsoons and intermittent floods resulted in lower than expected Kharif output. Even the Rabi has not been up to the mark and there are also logistics constraints to boot. The table below captures the Swing factors in the WPI basket on both sides. The left side looks at upward thrust or positive drivers; while the right side looks at the downward pressure or negative drivers for WPI inflation. It must be noted here that these are YOY WPI figures.

Commodity	WPI Inflation	Commodity	WPI Inflation
Onions	29.22%	Vegetables / Animal oils & Fats	-13.32%
Vegetables	19.78%	Oil Seeds	-10.43%
Pulses	18.48%	Mild Semi-Finished Steel	-6.49%
Crude Petroleum	16.65%	Paper & Paper Products	-6.42%
Potatoes	15.34%	High Speed Diesel (HSD)	-6.37%
Paddy	10.25%	Basic Metals	-5.72%
Cereals	6.63%	Chemicals & Chemical Products	-5.18%
Milk	5.46%	Fruits	-3.99%
Tobacco Products	4.26%	Cement	-1.94%
Wood & Wood Products	4.21%	Textiles	-1.90%

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 predominantly the food product and some global natural commodities that are exerting upward pressure on the WPI basket. They are driving the spike in WPI inflation. Out of the top 10 upward drivers of WPI inflation, 8 are agricultural and food products, 1 is a commodity and only 1 is a manufactured product. On the negative side, it well distributed. Out of the 10 top negative swing drivers of WPI inflation, 3 are agricultural and food products, 1 is a mineral commodity and the remaining 6 are manufactured products.

Let us also look at the picture on a cumulative basis. If you consider the cumulative 11 months of FY24 from April 2023 till February 2024, then the overall WPI inflation is in the negative zone at -0.82%. That is understandable as 7 out of the 10 months in FY24 have seen negative WPI inflation between April 2023 and November 2023. Among the components, primary articles reported cumulative WPI inflation at 3.42%, but there was a clear dichotomy. Food articles inflation came in at 6.55% cumulative for FY24 while inflation in non-food primary articles was negative at -5.76%. if you look at fuel & power, the cumulative WPI inflation for FY24 stands at -4.87%, which could have been deeper in the negative but for the static petrol and diesel prices. Now this is likely to trend lower. Finally, in the manufacturing basket, the WPI inflation for FY24 stands at -1.76%. The negative thrust is largely coming from primary manufacturing sectors like vegetable oils, wood products etc; apart from basic metals and metal fabrication products.

How will RBI interpret February 2024 WPI inflation?

The RBI has been on halt mode since February 2023 and has held the rates at the current level for 6 meetings in a row. That has helped GDP growth pick up; as is evident from the incoming growth data from MOSPI. With the GDP likely to get close to 8% for FY24, the RBI is unlikely to even consider rate hikes. The inflation has shown a steady trend of coming down in the last one year, despite the interim hiccups like in July last year. The RBI is likely to consider the fact that inflation is just about 110 bps away from the RBI target. It would most likely, not even consider rate hikes at this point of time. But, what about rate cuts?

Most likely, the RBI will hold back on rate cuts till the elections are completed, new government is in place and the full budget is announced. That would be July 2024. Any rate cut possibilities would only be considered after that. For now, it is just business as usual.