May 2022 WPI inflation surges to 31-year high of 15.88%

In the period between February 2022 and April 2022 wholesale price inflation (WPI) had surged 197 bps from 13.11% to 15.08%. However, that was hardly the end as the WPI inflation in May 2022 spiked another 80 bps to 15.88%. There are two reasons to worry here. Firstly, the May 2022 inflation at 15.88% is on a base of 13.11% WPI inflation in May 2021, so the cumulative impact is bigger. Secondly, not only is WPI inflation well above estimates, it is the highest level seen since the crisis of 1991, almost 31 years back. That was when India had pledged gold with the Bank of England.

Before we go further, let us spend a moment on understanding the practical importance of WPI inflation. WPI inflation assigns weightage of 64.23% to manufactured products, which makes it a better measure of producer costs. In a sense, this also makes WPI inflation a solid lead indicator of margin pressures on Indian corporates due to input cost spikes. It was a combination of food and fuel price spike, but the message is that inflation in India is not about consumption but about supply chain bottlenecks.

The rise and rise of WPI inflation in last 1 year

The month of May 2022 marked the 14th consecutive month double-digit WPI inflation. More importantly, this is also a 31-year high for WPI inflation. Higher WPI inflation in April 2022 was catalysed by factors like the Ukraine war, sanctions on Russia, lockdowns in China to address resurgence of COVID, central bank hawkishness, monetary tightness etc.

Data Source: Office of the Economic Advisor

One concern is upward revisions to previous WPI inflation estimates which also opens up the current WPI estimates for further upgrades. The February 2022 WPI inflation estimates have been scaled up by 32 bps from 13.11% to 13.43%. At the same time, the March 2022 WPI inflation estimates have also been raised by 8 basis points from 14.55% to 14.63%.

On a yoy basis, manufacturing inflation in May 2022 tapered lower on a sequential basis from 10.85% to 10.11%. Since manufacturing has a weightage of 64.23% in the WPI basket, this will keep overall WPI inflation in check, although food and fuel continue to be major risks. If you look at the overall WPI inflation basket; other than onions and pulses, all the other products in the WPI inflation basket, saw inflation growth over May 2021.

The broad narrative still remains the same. It is once again a case of supply not keeping pace with demand and Ukraine and China just adding to the supply side bottlenecks. The 31-year high WPI inflation can be explained by a surge in prices of vegetables, crude oil, minerals, LPG, base metals, finished steel, cereals, wheat, potatoes, oils and fats.

How WPI components panned out in last 3 months

Data Source: Office of the Economic Advisor

There has been a sharp spike in primary inflation which includes agricultural production and minerals production. Primary Articles inflation has surged from 15.45% in April 2022 to 19.71% in May 2022. This is largely on account of supply chain bottlenecks. This is an important trigger that is keeping the overall WPI inflation high.

For May 2022, fuel inflation rallied from 38.66% in April 2022 to 40.62% in May 2022. The government has not been raising prices of petrol and diesel after a spate of price hikes post March. Brent Crude at $122/bbl is the real pain point, although the cheaper imports of crude from Russia should help the Indian cause.

The good news is that manufacturing inflation in May 2022 tapered from 10.85% to 10.11% on a sequential basis. 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 wherever possible and that is leading to tepid demand for many consumer products. The third logical implication is that the weak demand is hitting capacity utilization leading to under-absorption of fixed costs.

How did high frequency WPI numbers pan out?

Shifts in WPI inflation are extremely input cost sensitive for the manufacturing sector. Hence, the high frequency MOM data is also very critical.

• For May 2022, overall MOM WPI inflation tapered from  2.01% to 1.38%. The MOM WPI inflation had spiked sharply between December 2021 and March 2022, but after touching a high of 2.48% in March, the number has been tapering.
• The real pressure is coming from the primary basket and the trend is clear if you look at the MOM data. In February 2022, the MOM primary articles inflation was zero and has since spiked to a high of 2.8%. It clearly shows that primary articles like, select agri products, oil, gas and minerals were exerting pressure.
• May 2022 again saw softening of manufacturing inflation on a MOM basis. Between March 2022 and May 2022, the manufacturing MOM inflation has tapered from 2.45% to 0.56% as the duty cuts helped keep manufacturing inflation in check.
• Even power and fuel inflation peaked at 4.93% sequential WPI inflation in April 2022 but since tapered to 2.25%.

There are some positive sequential tidings from fuel and manufactured products but as long as supply chain constraints hit the primary articles, the multiplier effect is a reality.

RBI worried about consumer inflation; more worried about WPI

In the month of May 2022, the consumer inflation tapered from 7.79% to 7.04%. However, during this period, WPI inflation spiked from 15.08% to 15.88%. RBI has set the ball rolling by hiking repo rates by 40 bps in May 2022 and 50 bps in June 2022. However, that will address CPI inflation but may not do much for WPI inflation. That would require more of international tapering of prices and better supply chain management here.

The Q4 results for India Inc are a stark reminder that operating margin pressures are a reality due to input cost spikes. That is reflected in WPI inflation. Q4 also saw tremendous pressure on working capital cycles and a spike in funds locked in trade receivables and inventories. RBI will do its best to tighten the market by raising rates, tighten liquidity and making thing uncomfortable. These are the only factors that RBI can influence for now!