WPI inflation scales 15-month high of 2.61% in May 2024

17 Jun 2024 , 12:44 PM

MAY-24 WPI INFLATION AT 15-MONTH HIGH OF 2.61%

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.

WPI INFLATION TRENDS IN THE LAST 6 MONTHS

There is no better way to understand WPI inflation trends, than by looking at a time series data. Here is a quick look at how the WPI inflation evolved over the last 6 months.

• Between December 2023 and May 2024, the overall WPI headline inflation moved from 0.86% to 2.61%; after touching a low of 0.20% in February 2024.
• Let us first look at the primary basket. The inflation in the primary basket moved up in the last 6 months from 5.73% in December 2023 to 7.20% in May 2024.
• However, there was a dichotomy in the primary basket. Within the primary basket, the food basket inflation was up from 9.32% to 9.82% in this 6 months period; while the non-food primary basket was stayed in the negative, but picked up from -5.20% to -3.99%; with most of the negative pressure coming from oilseeds.
• Let us now move to the trend in the fuel basket. Between Decemer2023 and May 2024, the fuel and power index moved from -1.39% to 1.35%, and this can be largely attributed to the concerns created by the Red Sea crisis. While LPG prices toned down, the pressure came from diesel prices in the economy.
• Finally, let us move to the trend in the manufacturing basket. Between December 2023 and May 2024, the manufactured products inflation has turned around from -0.78% to 0.78%. This spike in manufacturing inflation with rise in HSD inflation is a sign that Indian corporates are seeing a gradual rise in the cost of inputs.

The last 7 months since November 2023 have not only seen WPI inflation turn around from negative to positive, but also touch a 15-year high. Clearly, the impact on manufacturing costs would be visible in the coming quarters.

WPI AND CPI INFLATION TREND 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 (%)
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%
May-24	2.61%	4.78%

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 the primary basket; especially the primary food products. However, there is also a turnaround in the manufacturing inflation and that is having an oversized impact due to its substantial weightage in the WPI index. However, there is also the base effect at play in this entire story. For example, between April 2023 and May 2023, the base WPI inflation deepened further into the negative from -0.79% to -3.61% resulting in a spike in the WPI inflation in the current month of May 2024.

Last year in June 2023, the WPI inflation had bottomed out at -4.18% before gradually rising and getting back into positive territory. Hence, June could again be a month of high WPI inflation to contend with. 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 March 2024 has been reduced from 0.53% to 0.26%. The one thing to watch out will be the impact of rising manufacturing inflation on input costs of Indian companies.

WPI INFLATION (YOY) SHIFTS IN MAY 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	May-24 WPI	Apr-24 WPI	Mar-24 WPI
Primary Articles	0.2262	7.20%	5.01%	4.57%
Fuel & Power	0.1315	1.35%	1.38%	-2.75%
Manufactured Products	0.6423	0.78%	-0.42%	-0.85%
WPI Inflation	1.0000	2.61%	1.26%	0.26%
Food Basket	0.2438	7.40%	5.52%	4.82%

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 April 2024, while the negative inflation in manufacturing hardened, fuel turned around to positive and food inflation spiked higher. However, in May 2024, it was a combination of a sharp spike in the food basket inflation as well as the manufacturing WPI inflation turning around from negative to positive territory. Between March 2024 and May 2024, primary articles (comprising of mining and food crops) saw WPI inflation spiking from 4.57% to 7.20%. In the same period, fuel inflation hardened from a level of -2.75% to +1.35%, while manufacturing basket was hit by inflation hardening from -0.42% to +0.78%. Of course, there is no disputing the fact that, in India, fuel inflation is artificially subdued due to OMCS not hiking fuel prices. However, with the elections over, the prices may find their level; although the crude prices have also fallen from highs.

HIGH FREQUENCY MOM SHIFTS IN WPI INFLATION IN MAY 2024

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

Commodity Set	Weight	May-24 WPI	Apr-24 WPI	Mar-24 WPI
Primary Articles	0.2262	0.54%	1.91%	0.94%
Fuel & Power	0.1315	-2.71%	1.78%	-1.81%
Manufactured Products	0.6423	0.64%	0.50%	0.21%
WPI Inflation	1.0000	0.20%	1.06%	0.13%
Food Basket	0.2438	1.14%	1.77%	1.12%

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 the group index increasing by 0.54% in May, 2024 compared to April 2024. In term of components on the MOM high frequency scale, the prices of food articles were up 1.48% while that of minerals were up 1.08% in May, 2024. Within the primary basket, the prices of non-food articles were down -1.26% while crude petroleum & natural gas fell sharply by -3.56% in May, 2024 over April 2024.
• Let us now turn to the fuel and power basket; which has a weight of 13.15% in the WPI basket. The index for fuel & power group fell -2.71% to in May 2024 over April. Within the fuel and power basket, mineral oils and coal remained unchanged. However, the sharp fall came in the prices of electricity which fell by -11.67% on a MOM basis.
• Let us finally turn to manufactured products, which carries the highest weightage of 64.23%. The index for this major group increased MOM by 0.64%. Within manufacturing; out of the 22 NIC groups for manufactured products, 13 groups saw an increase in price, 8 groups saw fall in prices while one group was flat in terms of MOM price performance. Here is a quick look at some of the key groups. The groups that saw an increase in price MOM included basic metals, food products, computer, electronic & optical products, electrical equipment, etc. On the other hand, the products that saw fall in price in May 2024 over April include; fabricated metal products (except machinery & Equipment), other non-metallic mineral products, chemicals and chemical products, tobacco products, transport equipment etc.

Needless to say, the maximum pressure came from the primary basket and, even within the primary basket, the pressure point was the food basket. Clearly, the agricultural output shortfall is having an impact at multiple levels.

WPI BASKET – BIG SWING FACTORS IN MAY 2024

What do we understand by swing factors? These swing factor are key drivers of WPI inflation (both on the upside and downside). Since India saw lower than expected rainfall in July 2023, there has been pressure on the food basket. Subsequently, the pressure came from erratic monsoons, intermittent floods, and periodic drought conditions. Contributing to these challenges was the weak market infrastructure. Unlike in the previous year, the Rabi output could not really make up for the Kharif shortfall. The table below 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 shift is on a yoy basis.

Commodity	WPI Inflation	Commodity	WPI Inflation
Potatoes	64.05%	Oilseeds	-4.98%
Onions	58.05%	Paper & Paper Products	-4.86%
Vegetables	32.42%	Cement, lime, plaster	-3.42%
Pulses	21.95%	Chemicals & Chemical Products	-2.72%
Paddy	11.79%	Fabricated Metals	-2.43%
Crude Petroleum	11.07%	Sem-finished steel	-1.88%
Cereals	9.01%	Non-metallic mineral products	-1.86%
Wheat	6.00%	Vegetable oils & animal fat	-1.54%
Fruits	5.81%	High Speed Diesel (HSD)	-1.06%
Minerals	4.28%	Textiles	0.00%

Data Source: Office of the Economic Advisor

The story of the WPI inflation is now divided into 2 key narratives. On the left hand side (LHS) 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 basket and some global natural commodities. Out of the top 10 upward drivers of WPI inflation, 8 are agricultural and food products, and 2 are commodities. Out of the 10 top negative swing drivers of WPI inflation, 1 is an agricultural and food products, 1 is a mineral commodity and the remaining 8 are manufactured products. WPI depression continues to come from manufacturing.

OUTLOOK FOR FULL YEAR FY25 WPI INFLATION?

To be fair, it is too early since we just have two months of data now and that would be too limited to extrapolate for the full year WPI inflation for FY25. However, some basic insights are already there and let us look at how the distribution looks like. For FY25 (2 months data), the cumulative WPI inflation stands at 1.93%, in contrast to -2.21% in the corresponding period last year. The real pressure in FY25 is I the primary basket, which is up 6.09% in FY25 so far, as against -0.03% in the corresponding previous year. In FY25, the pressure comes from the food component of the primary basket, while the non-food basket continues to stay in negative inflation zone; albeit hardening compared to FY24.

If you look at the fuel & power inflation for FY25, it stands at 1.36%, compared to -4.29% in the corresponding period last year. The pressure has come from lesser contraction across all the key products like LPG, high speed diesel (HSD), and petrol. Finally, even the manufacturing WPI inflation for FY25 has turned around into positive from -2.66% to 0.18%. The upward pressure in manufacturing also come from manufactured food products, while most of the industrial metals and minerals are showing negative WPI inflation still. The moral of the WPI story in May 2024 is that the big pressure continue to be the food basket, in some form or the other!