WPI inflation edges up to 2.36% as food basket hardens

9 Dec 2024 , 01:38 PM

OCT-24 WPI INFLATION SURGES HIGHER TO 2.36%

The wholesale price index (WPI) inflation for October 2024 spiked from 1.84% to 2.36%. Incidentlaly, in the last 2 months when consumer inflation spiked from 3.65% to 6.21%, the WPI inflation has also spiked from 1.31% to 2.36%. Check the table below.

Month	WPI Inflation (%)	CPI Inflation (%)
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	1.25%	3.65%
Sep-24	1.84%	5.49%
Oct-24	2.36%	6.21%

Data Source: Office of the Economic Advisor

How much of the WPI spike is due to the base effect. Between September 2023 and October 2023, the WPI inflation did trend lower from -0.07% to -0.26%. However, that only explains part of the latest spike in WPI inflation. Much of the current spike in inflation is largely on account of the primary basket; which includes food and also other primary products. In terms of previous revisions, the August 2024 WPI inflation got revised lower from 1.31% to 1.25%. Ironically, the food price problem is arising despite a record monsoon and Kharif output this year. The pressure is largely coming from the vegetables and perishables basket, which saw supplies hit badly due to delayed exit of monsoons. Another signal that WPI gives out is whether it is likely to add to the cost of funds of Indian corporates. The sharp spike in manufacturing WPI is an indication that corporates are facing higher input cost inflation. Cumulative 7-month inflation in FY25 stands at 2.13% versus -1.53% last year.

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 May and October 2024.

• Between May 2024 and October 2024, the overall WPI headline inflation moved down from 2.74% to 1.25%; before bouncing back to 2.36% in the latest month of October.
• Let us first look at the primary basket. The inflation in the primary basket has consistently risen between July and October 2024 from 3.18% to 8.09%. In fact, inflation in the primary basket had peaked at 9.20% in June.
• Within the primary basket; the food basket has jumped sharply between August 2024 and October 2024 from 3.06% to 13.54%, with vegetables doing most of the damage. In the non-food primary basket, while oil seeds has bounced back into positive; crude petroleum and natural gas continue to stay in negative territory.
• Let us now move to the fuel basket. Between May 2024 and October 2024, the fuel and power index moved deeper into the negative zone from 1.01% to a level of -5.79%, with energy deflation being the sole saving grace for the WPI inflation basket.
• Let us move to the manufacturing basket. Between May 2024 and October 2024, the manufactured products inflation has moved up from 1.00% to 1.50%. This spike in manufacturing inflation is indicative of the gradual rise in the cost of inputs, with implications for manufacturing costs. Manufacturing has the highest weightage of 64.23% and within manufacturing, upward pressure has come from food products, vegetable oils, and beverages; while most metal products are in the negative.

There has been pressure on the manufacturing basket, but most of that pressure is coming from the food and beverage products. To that extent, the actual impact on input costs is likely to be limited.

WPI INFLATION SHIFTS: YOY AND MOM

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. Here inflation is year-on-year.

Commodity Set	Weight	Oct-24 WPI	Sep-24 WPI	Aug-24 WPI
Primary Articles	0.2262	8.09%	6.59%	2.52%
Fuel & Power	0.1315	-5.79%	-4.05%	-0.54%
Manufactured Products	0.6423	1.50%	1.00%	1.00%
WPI Inflation	1.0000	2.36%	1.84%	1.25%
Food Basket	0.2438	11.59%	9.47%	3.21%

Data Source: Office of the Economic Advisor

Three key things emerge from the YOY inflation story of October 2024. Firstly, the food basket is the real villain of the piece, as has been the case in CPI inflation also. Secondly, there is pressure on the primary basket; which is substantially caused by the food items and to a lesser extent by the mined products. Thirdly, energy is the one item that is trending lower and keeping WPI inflation on a YOY basis in check. Lastly, manufacturing inflation is showing signs of stress, although pressure is largely from food products. The metal products are still deflating; and that is not such a big worry for input costs.

Let us now shift to the high frequency MOM data on WPI inflation, which captures short-term trends more effectively.

Commodity Set	Weight	Oct-24 WPI	Sep-24 WPI	Aug-24 WPI
Primary Articles	0.2262	2.35%	0.31%	-1.37%
Fuel & Power	0.1315	-0.27%	-0.94%	0.07%
Manufactured Products	0.6423	0.49%	0.35%	-0.28%
WPI Inflation	1.0000	0.97%	0.13%	-0.58%
Food Basket	0.2438	3.02%	1.14%	-1.23%

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 are 3 key points.

• The primary articles with a weight of 22.6% in WPI basket, surged by 2.35% on MOM basis in October 2024. Big spike was seen in food articles (+3.37%), crude oil & natural gas (+0.41%). Minerals at -1.67% were subdued in October 2024.
• Fuel & Power with a weight of 13.15% declined by -0.27% MOM in October 2024. While electricity prices increased, price of mineral oils and coal was lower.
• Manufactured Products with a weight of 64.23% increased by 0.49% in October MOM. Out of the 22 groups for manufactured products, a total of 14 groups witnessed an increase in prices, 6 groups witnessed a decrease in prices, and 2 groups were flat. Food products, basic metals, machinery, and transport equipment were the pain points.

Let us now turn to the major swing factors in the WPI basket.

WPI BASKET – BIG SWING FACTORS IN OCTOBER 2024

Swing factor are the drivers that actually trigger the shift in WPI. It is not just about weightage, but about the extent of the movement. The left hand side (LHS) of the table looks at positive drivers; while right hand side (RHS) looks at negative drivers for WPI.

Commodity	WPI Inflation	Commodity	WPI Inflation
Potatoes	78.73%	Crude Petroleum	-12.98%
Vegetables	63.04%	Crude & natural gas	-12.16%
Onions	39.25%	Cement, Lime, Plaster	-7.56%
Vegetable oils & fats	20.16%	Petrol	7.35%
Fruits	13.55%	High Speed Diesel (HSD)	6.23%
Pulses	9.74%	LPG	-5.79%
Wheat	8.04%	Semi-finished Steel	-4.33%
Cereals	7.91%	Non-metallic Minerals	-4.06%
Food Products	7.77%	Fabricated Metal Products	-2.59%
Paddy	7.47%	Basic Metals	-2.25%

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 primary food basket, while the other two are from the manufactured food basket. The story of higher WPI is entirely about food.

What about the commodities putting downward pressure on the WPI inflation? Out of the 10 top negative swing drivers of WPI inflation, there are no agricultural product. There are 5 from the energy basket and 5 from the manufacturing basket. That has partially neutralized the food spike impact.

OUTLOOK FOR FISCAL FY25 WPI INFLATION?

For FY25, we now have 7 months of WPI data. For the 7 months cumulative period, the WPI inflation stands at 2.13%, compared to -1.53% in the year ago period. Primary basket is elevated at 5.98% in FY25, while the food basket within primary basket is at 8.56% in FY25. Perishables and pulses are applying most of the pressure in FY25.

Fuel & power inflation is at -1.17% in FY25, and could have been lower had it not been for higher LPG prices. However, fuel was deep in the negative last year. Let us finally turn to manufacturing. At 1.06% in FY25, it is sharply higher than -2.19% in FY24. Most of the pressure is coming from the food products and vegetables oils basket, while other manufactured products are neutral to lower. Clearly, the big challenge for the WPI and the CPI basket this time around is the food conundrum.