Jan-22 WPI inflation at 12.96% as manufacturing inflation eases

Between Dec-21 and Jan-22, the wholesale price inflation (WPI) tapered by another 60 bps to 12.96%. From the recent WPI inflation peak of 14.87% in Nov-21, the wholesale producer inflation has fallen 191 bps. If you look at it on a sequential basis, the fall was triggered by primary articles, including the food basket. Despite the cut in excise and VAT on oil the high-frequency month-on-month fuel inflation is sharply higher due to crude spiking to $96/bbl.

Wholesale Price Index or WPI inflation is a better indicator of input costs as it assigns a higher weightage of 64.23% to manufactured products. On the other hand, CPI inflation is dominated by the food basket. Also, WPI looks at prices from the producer perspective or the factory gate rather than consumer prices.

How WPI inflation trended in the last one year?

The chart captures the trend of WPI inflation over the last one year.

Data Source: Office of the Economic Advisor

Since April 2021, the WPI inflation has been consistently in double digits. The WPI inflation had peaked at 14.87% (revised 64 bps higher in final estimates) in Nov-21 and has tapered by 191 bps between Nov-21 and Jan-22 as food and primary articles prices have tapered.

On a yoy basis, the good news is that manufacturing inflation is falling and that is leading WPI inflation lower due to its 64.23% weight. From metals to automobiles to cement; supply chain constraints are pushing up costs across the board. It is about supply failing to keep pace with demand. For instance, supplies of ores and minerals are unable to keep pace with growing demand for metals. Auto companies have seen 15-20% fall in output due to non-availability of microchips, that make cars smarter. The slowdown in demand for autos and construction put pressure on steel output; creating a vicious circle.

The trend of rising WPI inflation is underlined by upward revisions. The final WPI inflation estimate for Sep-21 was held constant at 11.80%. However, first estimates for WPI inflation for Nov -21 has been upped by 64 bps from 14.26% to 14.87%. This opens up the possibility of upward revisions in WPI inflation in Dec-21 and Jan-22 also.

Capturing components of WPI inflation (yoy growth)

Data Source: Office of the Economic Advisor

In the WPI basket, manufactured products have top weightage of 64.23%. Primary articles include crops and other products like oil and ores mined from the earth. The food basket is a combined basket of food items from primary articles basket and the manufactured products basket, which is why it is shown as a separate item for clarity purpose.

Fuel and power is what tapered in Dec-21 from 44.37% to 32.30% due to the impact of the excise and VAT cuts, but has remained static in Jan-22 at 32.27%. The bulk of the WPI pressure in Jan-22 again came from the food basket with the yoy WPI food inflation spiking from 6.83% in Nov-21 to 9.24% in Dec-21 and further to 9.55% in Jan-22.

The overall WPI inflation tends to gravitate towards manufactured products due to its high weightage. In Jan-22 the manufactured products inflation tapered further from 10.62% to 9.42% indicating that the government measures in the form of duty cuts on targeted input imports was having a salutary impact on manufacturing WPI inflation.

Sequential WPI points to fuel as inflation driver in Jan-22

While the YOY inflation captures the broad trend of wholesale inflation, it is the sequential month-on-month inflation that captures momentum.

- For Jan-22, primary articles saw wholesale inflation at -1.67% sequentially. Food articles were also down by -1.60% on sequential basis, indicating tapering of producer effect.

- Fuel and power inflation spiked on a sequential basis in Jan-22 by 3.90% which is a sign that the crude oil price spike to $96/bbl had more than neutralized the duty cuts.

- Manufactured products inflation was more subdued at 0.51% on a sequential basis. However, statistically if you look at sequential price movement, 18 out of the 22 products in the manufacturing basket saw a spike in price. Manufactured products that saw a spike were basic metals, motor vehicles, trailers, machinery & equipment, textiles, chemicals and chemical products. However, wood, tobacco products, pharma, medicinal products and botanical products saw prices tapering in Jan-22.

Summing up the WPI inflation story for Jan-22

On a sequential basis, the overall WPI inflation was up 0.35% in Jan-22. On a sequential basis, the food and primary articles inflation is lower while manufacturing inflation has risen at a more sober rate. In the previous month, we had cautioned that with rising tensions in the Ukrainian region, crude posed the biggest momentum risk to WPI inflation. That has largely been borne out in Jan-22 with 3.90% sequential inflation in fuel, oil and electricity. With Crude at $96/bbl and no supply support visible, that remains the big risk factor.

The proof of the pudding lies in the eating and the input cost pressures (as hinted by WPI inflation) was starkly visible in the Dec-21 quarterly results of Indian companies in the form of pressure on operating margins. For now, there is no let-up on this corporate pain point!