WPI inflation surges to 17-year high of 15.08% in April 2022

17 May 2022 , 06:12 PM

Between February 2022 and March 2022 wholesale price inflation (WPI) had surged 144 bps from 13.11% to 14.55%. However, in April 2022, the WPI inflation surged by another 53 bps to 15.08%. There are two things of note here. Firstly, the April 2022 inflation at 15.08% is on a base of 10.74% WPI inflation in April 2021, so the relative impact is much higher. Secondly, the Reuters consensus estimate for WPI inflation for April 2022 had pegged the figure at 14.48%. The actual number is a good 60 bps above the Reuters estimate.

What exactly is the practical application of WPI inflation?

WPI inflation assigns a high weightage of 64.23% to manufactured products. This makes WPI inflation a sound lead indicator of margin pressures on Indian corporates due to input cost spikes. What is actually disconcerting is that the WPI inflation for April 2022 is at a 17-year high; with these kind of inflation numbers last seen in April 2005. Once again, it was a combination of food and fuel prices that resulted in a surge in WPI inflation in April 2022.

How did WPI inflation trend in the last one year?

April 2022 marked the 13th consecutive month WPI inflation stayed in double digits. But all that pales in comparison to the fact that this is a 17-year high on WPI inflation. Higher WPI inflation in April 2022 was catalysed by the Ukraine war, which resulted in a sharp rally in a plethora of base commodities and the supply chain constraints imposed by China lockdown.

One concern is upward revisions to WPI inflation. February 2022 WPI inflation was originally estimated at 13.11% but now raised 32 bps to 13.43%. That is a lot of data being missed out and raises the possibility of March and April inflation also being revised higher.

On a yoy basis, manufacturing inflation was higher at 10.85%. Since manufacturing has 64.23% weight in the WPI basket, this will keep overall WPI inflation in double digits. If you look at the overall WPI inflation basket; other than onions and pulses, all the other products in the WPI inflation basket, have seen positive growth in prices over April 2021.

It was again a case of supply not keeping pace with demand and Ukraine and China are worsening the story. The 17-year high rate of WPI inflation can be largely explained by a surge in prices of mineral oils, basic metals, crude petroleum, natural gas, food products, chemicals and chemical products.

How do the various components of WPI look yoy?

Commodity Set	Weight	Apr-22 WPI	Mar-22 WPI	Feb-22 WPI
Primary Articles	0.2262	15.45%	15.54%	13.87%
Fuel & Power	0.1315	38.66%	34.52%	30.84%
Manufactured Products	0.6423	10.85%	10.71%	10.24%
WPI Inflation	1.0000	15.08%	14.55%	13.43%
Food Basket	0.2438	8.88%	8.71%	8.67%

Data Source: Office of the Economic Advisor

There is an interesting trend in primary articles inflation. Food inflation is up to 8.88% but overall primary inflation (crops are a part of primary inflation) is up sharply to 15.45%. While most agri-related inputs are under control, mined inputs like minerals, crude and ores are experiencing rampant inflation.

For April 2022, fuel inflation continues to spiral out of control at 38.66%. Since March 2022, the government has been consistently raising the price of petrol and diesel, so that is actually translating into upstream and downstream inflation. Globally Brent Crude is back at $114/bbl and that makes most sectors vulnerable to the crude price impact.

Manufacturing inflation in April 2022 at 10.85% yoy reflects further pressure on input costs. Supply was already struggling to sync with demand and the Ukraine war has worsened it. Manufacturers are passing on higher costs to the end customers and the impact is already being felt in tepid demand for most consumer goods. The third logical implication is that this the weak demand was hitting capacity utilization leading to under-absorption of fixed costs.

In WPI inflation, it is the MOM story that is truly insightful

Since the shifts in WPI inflation are extremely input cost sensitive for the manufacturing sector, it is the high frequency MOM data that is of a lot more interest.

• For April 2022, overall MOM WPI inflation tapered to 2.08%, with minimal incremental price momentum. The MOM WPI inflation has moved up from 0.35% in January to 1.04% in February and a steep 2.41% in March; but tapered to 2.08% in April.
• In Mar-22, there was a substantial contribution made to WPI basket by the primary basket (especially oil, gas and minerals). From 1.67% primary articles inflation in March 2022, it has spiked to 2.70% in April 2022.
• Mar-22 saw softening of manufacturing inflation. It progressively moved from 0.51% in January to 1.24% in February and 1.94% in March. However, the MOM manufacturing inflation has softened to 1.69% in April 2022.
• Finally, we come to fuel & power inflation. Sequential fuel inflation spiked from 1.12% in January to 2.22% in February and a much steeper 6.22% in March. However, the MOM fuel and power has softened to 2.79% in April 2022, albeit still elevated.

WPI at 7-year high means RBI accommodation is done and dusted

If consumer inflation at 7.79% was the first hint, it has almost been ratified by the WPI inflation at a 17-year high of 15.08% in April 2022. The RBI has set the ball rolling by hiking repo rates by 40 bps in May and CRR by 50 bps. The spike has been intense across the 3 baskets of fuel, primary products and manufactured products. Supply chain constraints are pinching but the bigger risk is that the rampant imported inflation is also weakening the rupee. For the RBI, there is just one solution to the problem; and that is rate hikes.

The Q4 results for India Inc are revealing in more ways than one. Now it is not just about the operating margin pressures due to rising input costs. It is about the pressure on working capital cycles and a big spike in funds locked in trade receivables and inventories. A major chunk of the input cost spike has been passed on to the end consumer but that is going to be increasingly difficult in the days ahead. The latest WPI inflation number has left the RBI will limited choice. RBI needs to raise rates, tighten liquidity and make thing uncomfortable. There is really no other option now!