WPI inflation tapers to 0.27% in January 2024

15 Feb 2024 , 09:19 AM

WPI tapers by 46 basis points to 0.27% in January 2024

In a sense, we can say that the wholesale inflation or (WPI inflation) is almost back to square one. Bet November 2023 and December 2023, the WPI inflation had surged sharply from 0.26% to 0.73%. However, in January 2024, the WPI inflation has again fallen back to 0.27%. If you look at the break-up of the WPI inflation, the fall in inflation can be attributed to food and primary products. 

It can also be attributed to a lesser extent to the taming of manufacturing cost inflation during the month of January 2024. The primary articles inflation includes food cropping as well as mining of minerals from the earth. However, the Office of the Economic Advisor also presents the Food basket index separately for the sake of information. However, it is the manufactured products basket that has the highest weightage in the WPI basket.

Why the WPI inflation matters at a macro level?

It must be noted here that the primary articles inflation includes cropping of food products, mining of minerals as well as fisheries and forestry products. The food basket, which is a composite basket, draws the cropping part of food from the primary basket and the manufactured food products are drawn from the manufacturing basket. As can be seen in the table below, the WPI inflation was in negative territory for 7 months between April 2023 and October 2023. However, since November 2023, WPI inflation has stayed in the positive. 

WPI prices have two important implications from a macro perspective. Firstly, the WPI inflation is the price movements at a producer level, so its eventually gets transmitted into CPI inflation, albeit with a lag. The second important application of WPI inflation is that it is reflective of the input costs for manufacturers and also the manufacturing price realized. Hence WPI inflation needs to be in balance. Too high levels of inflation are not good and at the same time, very low levels of WPI inflation (especially negative WPI inflation) can be unproductive in the long run.

Journey of WPI and CPI inflation 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 and captured on a yoy basis.

Month	WPI Inflation (%)	CPI Inflation (%)
Jan-23	4.73%	6.52%
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	0.73%	5.69%
Jan-24	0.27%	5.10%

Data Source: Office of the Economic Advisor

If you look at the last 12 months of data as captured in the table above, the WPI inflation finally turned around to positive in November 2023 after being in the negative zone for 7 months in a row. However, December has actually seen the positive consolidation of the WPI inflation. Of course, the sharp spike in the WPI inflation in December can be attributed to food related inflation, since manufactured products and fuel prices are still in the negative zone. However, with the sobering of food prices, the WPI inflation in January 2024 is back to the November 2023 levels. It is a case of food wholesale inflation unwinding.

If you look back at the data for previous months, The final revision for November 2023 data has come in and it is slightly hawkish in the sense that the WPI inflation has been revised upwards from 0.26% to 0.39% and the modified data is reflected in the table above. This increases the likelihood that the final inflation figure for December 2023 and January 2024 could also be higher due to the impact of more data points coming in. One interesting question is the extent of correlation between WPI and CPI inflation. The correlation coefficient for the last 13 months period stands at 0.4944, which can be classified as low correlation. However, it is all about lag effect and also, a clearer picture of correlation will only be available if we look at a longer period data points.

Key drivers of WPI inflation in December 2023

To understand the trend in WPI inflation, a quick look at the component wise break-up of WPI inflation should be useful input. The table below captures this underlying trend.

Commodity Set	Weight	Jan-24 WPI	Dec-23 WPI	Nov-23 WPI
Primary Articles	0.2262	3.84%	5.78%	5.16%
Fuel & Power	0.1315	-0.51%	-2.41%	-4.05%
Manufactured Products	0.6423	-1.13%	-0.71%	-0.78%
WPI Inflation	1.0000	0.27%	0.73%	0.39%
Food Basket	0.2438	3.79%	5.39%	5.15%

Data Source: Office of the Economic Advisor

What is our quick reading of WPI inflation data above? Most of the bounce in WPI inflation in November 2023 and December 2023 came from food and primary articles. Hence it is only logical that most of the fall in WPI inflation in January 2024 was also driven by food and primary articles. Between October 2023 and December 2023, primary articles (comprising of mining and food cropping) saw WPI inflation increasing from 2.26% to 5.78%. In January 2024, primary articles inflation tapered sharply to 3.84%. This trend was fairly pronounced in the specific food basket which saw a spike from 1.07% to  5.39% between October 2023 and December 2023. However, in January 2024, this has tapered sharply to 3.79%. 

Fuel inflation has been persistently in the negative zone and the fuel inflation has been gradually hardening in the last 2 months from -4.05% to -0.51%. Clearly, the Red Sea crisis is having its impact on fuel prices as the higher freight costs and the higher insurance costs are resulting in higher crude costs for Indian players. Manufacturing inflation stayed subdued, which keeps the end prices under check. It has been in the negative for the last 3 months and we saw the negative WPI inflation deepening in January 2024 from -0.71% to -1.13%, a clear indication of sobering input costs in this period.

High frequency (MOM) WPI inflation for January 2024

The yoy inflation we have seen till now is susceptible to the base effect. For a volatile data point like WPI, the MOM captures short term trends best. That is why the WPI report by the Office of the Economic Advisor, also looks at MOM (high frequency) WPI inflation. 

Commodity Set	Weight	Jan-24 WPI	Dec-23 WPI	Nov-23 WPI
Primary Articles	0.2262	-1.04%	-2.51%	1.24%
Fuel & Power	0.1315	0.39%	-1.28%	0.45%
Manufactured Products	0.6423	-0.21%	-0.07%	-0.14%
WPI Inflation	1.0000	-0.33%	-0.98%	0.39%
Food Basket	0.2438	-1.06%	-2.18%	2.00%

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 January 2024 stood at -1.04%. The price increase was seen in minerals (0.93%). However, the other key items were in the negative. For instance, crude petroleum and natural gas at -0.33%, non-food articles at -0.49% and food articles at -1.36% combined to keep the overall primary basket inflation in the negative.

   

• Let us turn to the MOM WPI movement of Fuel & Power. The index for this group saw increase of 0.39% in January 2024 compared to December 2023. The upward pressure here predominantly came from prices of Electricity (+3.30%), which was neutralized only to a partial extent by prices of coal (-0.37%) and mineral oils (-0.56% in the month of January 2024. 

   

• Finally, we come to the all-important Manufactured Products category. This segment saw -0.21% contraction on MOM basis in January 2024 over December 2023. Out of the 22 categories of manufactured products tracked by the WPI manufacturing basket, 9 groups witnessed an increase in prices, 12 groups witnessed decrease in prices and 1 group remained neutral. The price increases were led by machinery & equipment, textiles, beverages, motor vehicles, trailers, semi-trailers, rubber, and plastic products. The groups that saw negative WPI inflation on MOM basis included food products, basic metals, other manufacturing, chemicals, chemical products, and other non-metallic mineral products.

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.

Swing factors in the WPI basket in January 2024

What exactly do we understand by swing factors? 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. In addition, supply chain constraints are causing delays in the Kharif output hitting the mandis. The table below captures the Swing factors in the WPI basket on both sides. The left side looks at upward thrust or positive drivers on WPI inflation while the right side looks at the downward pressure or negative drivers for WPI inflation. All the figures are on a yoy basis.

Commodity	WPI Inflation	Commodity	WPI Inflation
Onions	29.18%	Vegetables / Animal oils & Fats	-15.71%
Vegetables	19.71%	Oil Seeds	-9.38%
Pulses	16.06%	Potatoes	-8.41%
Paddy	9.56%	Paper & Paper Products	-6.41%
Minerals	7.61%	Mild Semi-Finished Steel	-6.08%
Milk	5.38%	Chemicals & Chemical Products	-5.51%
Crude Petroleum	4.13%	High Speed Diesel (HSD)	-5.29%
Cereals	4.07%	Basic Metals	-4.47%
Tobacco	3.44%	Wheat	-3.14%
Wood & Wood Products	3.21%	Textiles	-2.26%

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 minerals that are exerting positive pressure on the WPI basket. They are actually driving most of the spike in WPI inflation. Out of the top 10 upward drivers of WPI inflation, 7 are agricultural and food products, 2 are commodities 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, 4 are agricultural and food products while the other 6 are manufactured products. The lower of food inflation is visible in the above table.

How does the picture look on a cumulative basis. If you consider the cumulative 10 months of FY24 from April 2023 till January 2024, then the overall WPI inflation is in the negative zone at -0.94%. That is understandable as 7 out of the 10 months in FY24 have seen negative WPI inflation. Among the components, primary articles reported cumulative WPI inflation at 3.32%, but there was a clear dichotomy. Food articles inflation came in at 6.52% cumulative for FY24 while inflation in non-food primary articles was negative at -5.66%. if you look at fuel & power, the cumulative WPI inflation for FY24 stands at -5.29%, which could have been deeper in the negative but for the static petrol and diesel prices. Finally, in the manufacturing basket, the WPI inflation for FY24 stands at -1.80%. The negative thrust is largely coming from primary manufacturing sectors like vegetable oils, wood products etc.

How will RBI interpret sobering WPI inflation in January 2024?

At best, the RBI stays wary of too high or too low WPI inflation; but for most of its decision making, it still relies on CPI inflation. High WPI inflation eventually translates into high CPI inflation; while very low or negative WPI inflation is detrimental to the profitability and investment goals of corporates. In November 2023, the WPI inflation had turned positive after 7 months of negative WPI inflation and has held in positive since then.

The good news is that the WPI inflation appears to have bottomed out and at least negative WPI inflation now appears to be a thing of the past. For now, the RBI has kept rates static for the last 6 policies. Regarding the impact of the Red Sea shock, the impact on the WPI basket has only been limited. If WPI also remains stable, the RBI may have a good base case to consider rate cuts in the second half of 2024!