WPI inflation scales 1-Year high of 1.26% in April 2024

23 May 2024 , 08:45 AM

WPI INFLATION TOUCHES YEARLY HIGH OF 1.26% IN APRIL 2024

The wholesale price index (WPI) inflation for April 2024 touched a yearly high of 1.26%. There were two things significant about this reading. Firstly, it is the highest level of WPI inflation seen since March 2023. Secondly, if you consider the last 13 months, this is the highest level of WPI inflation witnessed by India since the data dipped into negative. April 2024 marks the sixth month in a row that WPI inflation remained in positive territory. This comes after 7 consecutive months of negative WPI inflation between April 2023 and October 2023. However, since November 2023, WPI inflation has been positive and the positive trend just about got accentuated in April 2024.

It must be remembered that the WPI inflation for FY24 stood in the negative at -0.70% due to the wholesale inflation being in the negative for 7 out of the 12 months. The food prices, incidentally, have been under stress since June 2023, when the reports of weak monsoons first came in last year. However, the overall WPI inflation continued to be in the negative till October 2023, largely due to the impact of manufacturing inflation being in the negative and oil inflation also being in the negative. To an extent, the low manufacturing WPI inflation has been instrumental in keeping input costs low for Indian companies, helping them report robust bottom line numbers for FY24.

SHIFT IN BASE YEAR AND THE WPI / CPI INFLATION GAP

There are two aspects we will discuss here. The first is the proposed shift in the base year for CPI inflation, WPI inflation, IIP and for GDP. While the final decision is yet to be taken, it is now expected that the base year would be moved from 2011-12 to 2023-24. The idea is that it would be more reflective of the real inflation story in India and also the real growth story in India, if the base year is more current. However, that process may only start after the outcome of the elections are known and the new government is in place. For now, the shift in base year is only likely to happen by FY26, so it is unlikely to impact the inflation or growth numbers for the current year FY25. But, let us quickly change track to look at why the gap between WPI and CPI inflation continues to be so high.

One question that arises is why the huge gap between WPI inflation and CPI inflation? There are several reasons. Firstly, an obvious inference is that the cost benefits that corporates are enjoying is not visible in the household budgets. In short, there is rising pressure on households budgets while corporate margins are getting a boost. The second is about the weightages. The CPI inflation gives the higher weightage to the food basket while the WPI inflation assigns the highest weightage to the manufacturing basket. Thirdly, the global prices of most industrial commodities have been at lows and that has subdued WPI inflation. On the other hand, the Indian food basket is domestically driven. That has been hit by erratic rains, delayed sowing, and weak marketing infrastructure. This is another factor responsible for the dichotomy between WPI and CPI inflation. Also, lower fuel prices yoy had a salutary impact on WPI inflation, compared  to CPI inflation. It is true that WPI inflation is a lead indicator of CPI inflation, although the time lags may vary over time.

HOW WPI AND CPI INFLATION TRENDED IN LAST 1 YEAR

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 (%)
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%
Mar-24	0.53%	4.85%
Apr-24	1.26%	4.83%

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 in FY24 from April to October. In the month of April, the pressure is coming from food and fuel, but even the negative inflation in manufacturing is abating as commodity prices globally are picking up steam. There is also the base effect at play. Between March 2023 and April 2023, the base WPI inflation fell from 1.34% to -0.79% resulting in a spike in the WPI inflation in the current month of April 2024. Due to persistently negative inflation between April 2023 and October 2023, the pressure on WPI inflation is likely to continue for some more time.

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 February 2023 has remained static at 0.20%. However, some of the components of February inflation have changed, especially the rise in food, offsetting the fall in fuel.

WHAT TRIGGERED WPI INFLATION (YOY) SHIFTS IN APRIL 2024

Here is a quick look 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. Manufacturing has the highest weightage of 64.23%.

Commodity Set	Weight	Apr-24 WPI	Mar-24 WPI	Feb-24 WPI
Primary Articles	0.2262	5.01%	4.51%	4.55%
Fuel & Power	0.1315	1.38%	-0.77%	-1.71%
Manufactured Products	0.6423	-0.42%	-0.85%	-1.27%
WPI Inflation	1.0000	1.26%	0.53%	0.20%
Food Basket	0.2438	5.52%	4.65%	4.14%

Data Source: Office of the Economic Advisor

Between November 2023 and February 2023, the shifts in WPI inflation were largely driven by the vicissitudes of food basket. In March 2024, the shift in WPI inflation was not driven by food, but by the negative inflation in fuel and manufacturing hardening. In April 2024, while the negative inflation in manufacturing hardened, fuel turned around to positive and food inflation spiked higher. Between February 2024 and April 2024, primary articles (comprising of mining and food crops) saw WPI inflation spiking from 4.55% to 5.01%. In the same period, fuel inflation hardened from a level of -1.71% to +1.38%, while manufacturing basket was hit by inflation hardening from -1.27% to -0.42%. One concern here is that fuel inflation may have been artificially subdued due to OMCS not hiking fuel prices. Once the prices are hiked post the budget, we could see a lot more of fuel impact on WPI inflation.

HIGH FREQUENCY MOM SHIFTS IN WPI INFLATION IN APRIL 2024

The yoy inflation above is too vulnerable to the base effect. One option is to look at the high frequency MOM WPI inflation. This captures short-term trends better. Here is a quick look at how the MOM WPI evolved in the last 3 months.

Commodity Set	Weight	Apr-24 WPI	Mar-24 WPI	Feb-24 WPI
Primary Articles	0.2262	1.97%	0.88%	0.06%
Fuel & Power	0.1315	-0.26%	0.19%	0.00%
Manufactured Products	0.6423	0.50%	0.21%	0.07%
WPI Inflation	1.0000	0.79%	0.40%	0.00%
Food Basket	0.2438	1.94%	0.95%	0.17%

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.

• Primary Articles, which has a weight of 22.62%, saw MOM increase of 1.97% in April 2024. The month saw a spike in prices of crude petroleum & natural gas (3.56%) and food articles (2.67%). Primary articles is not just about food cropping but also about mining of key minerals. In the non-food primary basket, the WPI inflation remained in the negative at -1.19%, with minerals seeing -1.55% inflation MOM.
• Let us now to fuel and power, which has a weight of 13.15% in the WPI basket. The fuel basket saw negative WPI inflation of -0.26%; but much higher than last 2 months. Broadly, the prices of mineral oils were up 0.06% MOM while the price of electricity witnessed a decline by -1.20% in April on MOM basis.
• Let us finally turn our attention to manufactured products, which carries the highest weightage of 64.23%. The MOM inflation in manufacturing was 0.50%, showing short term pressure on manufacturing inputs. Out of the 22 manufactured products in the basket, a total of 15 groups saw an increase in price, 5 groups saw a fall in price while 2 groups were neutral. Key products that saw a spike in price include basic metals, other manufacturing, textiles, food products, chemicals & chemical products etc. The specific groups that saw a fall in inflation were non-metallic mineral products, paper products, motor vehicles, trailers & semi-trailers, furniture, and leather products. All these are MOM numbers over March 2024.

High frequency WPI inflation gives a quick picture of where the short term trends are, and for now it looks like the trend of hardening WPI inflation is here to stay. More so, considering that the corresponding period last year was a period of negative inflation so the base effect can cause a lot of damage.

WPI BASKET – SWING FACTORS IN APRIL 2024

Swing factor are key drivers of WPI inflation (both on the upside and downside). Since the lower than expected rainfall in July 2023, there has been pressure on food basket. Subsequently, the pressure came from erratic monsoons, intermittent floods, and periodic drought conditions. Even weak market infrastructure added to the problems. In 2023, Rabi could not offset the Kharif shortfall; as has been the case in the past. The table captures the Swing factors in WPI basket on both sides. The left side looks at positive drivers; while the right side looks at negative drivers for WPI inflation. All data is on a yoy basis.

Commodity	WPI Inflation	Commodity	WPI Inflation
Potatoes	71.97%	Liquefied Petroleum Gas (LPG)	-9.40%
Onions	59.75%	Paper & Paper Products	-6.93%
Vegetables	23.60%	Oil Seeds	-6.41%
Pulses	16.58%	Vegetable & animal oil and fats	-5.02%
Paddy	12.03%	Semi-Finished Steel	-4.07%
Crude Petroleum	6.52%	Basic Metals	-3.65%
Wheat	5.69%	Cement, lime, plaster	-3.63%
Tobacco Products	4.53%	Chemicals & Chemical Products	-3.61%
Milk	4.30%	Fruits	-1.78%
Wood Products	3.82%	Non-metallic Minerals	-1.78%

Data Source: Office of the Economic Advisor

The story of the WPI inflation is now divided into two narratives, which are captured on the left hand side (LHS) and the right hand side (RHS) of the above table. On the left side are the products that are driving the yoy WPI inflation higher. Not surprisingly, most of the pressure on WPI inflation is coming from food product and some global natural commodities. 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. 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.

OUTLOOK FOR FULL YEAR FY25 WPI INFLATION?

To be fair, it is too early since we just have one data point now and that would be too limited to extrapolate full year WPI inflation for FY25. However, the previous year data would provide some insights. If you consider the FY24 WPI inflation for the full year from April 2023 till March 2024, the overall WPI inflation stood at -0.70%. This is sharply lower than +6.52% recorded in FY23. In FY24, for 7 months in succession between April 2023 and October 2023, the WPI inflation was negative. How is FY25 likely to be different from FY24 in terms of full year inflation estimate?

FY25 WPI inflation is likely to be in the positive because 7 months of negative WPI inflation base would be enough to push up WPI inflation in FY25. For FY24, the food inflation stood at 6.58% for the full year, while inflation for minerals and manufacturing stood in the negative. While food inflation may taper based on the quality of rains this year, both minerals inflation and manufacturing inflation will be higher. Also, with the Red Sea crisis, fuel will not offer much respite. Overall, it will be a tough WPI story in FY25.