Dec-21 WPI Inflation falls to 13.56% as fuel prices taper

17 Jan 2022 , 08:49 AM

Between Nov-21 and Dec-21, the wholesale price inflation (WPI) tapered by 67 bps to 13.56%. If you look at on a sequential basis, the biggest impact was seen on fuel prices. Last month, the fuel GST and VAT cuts were not factored in. However, outside of fuel, input cost spike, caused by supply chain constraints, continues to remain sticky at higher levels.

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. This is unlike CPI inflation which is dominated by the food basket. Secondly, WPI looks at prices from the producer perspective or the factory gate rather than from the consumer perspective.

How has WPI inflation trended in last one year?

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

Data Source: Office of the Economic Advisor

Clearly, since April 2021, the WPI inflation has been consistently in double digits. The WPI inflation had peaked at 14.23% in Nov-21 and has tapered in Dec-21 with the sharp fall in fuel prices as the impact of the cuts in GST and state VAT, started getting factored in.

From metals to automobiles to cement, it is the supply chain constraints pushing up costs everywhere. In case of metals, supplies of ores and minerals are unable to keep pace with growing demand. For aluminium and cement, that are power intensive, the spike in power costs has been hitting production. Auto companies have seen 20% fall in sales and output due to non-availability microchips, which make cars smarter. There are collateral effects too. The slowdown in demand from autos and construction has put pressure on steel output, and the logical sequences can go on.

The trend of rising WPI inflation is also underlined by the inflation revisions. If you look at WPI inflation for the months of August 2021 and October 2021, the overall situation was mixed. For example, the final WPI inflation estimate for Aug-21 has been held constant at 11.67%. However, WPI inflation for Oct-21 has been upped sharply from 12.54% to 13.83%. This opens up the possibility of upward revisions in WPI inflation in Nov-21 and Dec-21 too.

Capturing components of WPI inflation (yoy)

Commodity Set	Weight	Dec-21 WPI	Nov-21 WPI	Oct-21 WPI
Primary Articles	0.2262	13.88%	10.34%	7.38%
Fuel & Power	0.1315	32.30%	39.81%	38.61%
Manufactured Products	0.6423	10.62%	11.92%	12.87%
WPI Inflation	1.0000	13.56%	14.23%	13.83%
Food Basket	0.2438	9.24%	6.70%	4.25%

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 created by combining the food items from primary articles basket and the manufactured products basket, which is why it is shown as a separate item for clarity.

Fuel and power is what tapered in Dec-21, and that is also visible in the sequential numbers as fuel inflation tapered from 39.81% to 32.30% with the impact of the GST and VAT cuts taking effect. Interestingly, the bulk of the WPI pressure in Dec-21 came from the food basket with the producer food inflation spiking from 4.25% in Oct-21 to 6.70% in Nov-21 and a whopping 9.24% in Dec-21.

The overall WPI inflation normally tends to gravitate towards manufactured products due to its high weightage. However, in Dec-21, the manufacturing and fuel baskets actually tapered. The maximum pressure on WPI inflation came from the food basket and from the primary article basket, showing clear signs of supply chain constraints.

Sequential WPI points to food as the key driver in Dec-21

While the YOY inflation captures the broad trend of wholesale inflation, it is the sequential month-on-month inflation that will rally capture the momentum. Here is how short term momentum panned out in December 2021.

• For Dec-21, primary articles saw wholesale inflation at -0.47% sequentially. Non-food articles were higher 4.59% sequentially. However, minerals were down -6.10% while crude and natural gas were down -3.19% in Dec-21. Food articles were also down by -1.07% on sequential basis.
• Fuel and power inflation on a sequential basis for Dec-21 was down -2.66% which is a sign that the GST and VAT cuts are beginning to manifest. The inflation in coal costs was flat at 0.38% while mineral oils were down -4.28%. Coal inflation has tapered with the coal supply issue being addressed.
• Manufactured products inflation was more subdued at 0.22% on a sequential basis. However, statistically if you look at the price movement, then 16 out of the 22 products in the basket saw a spike in price on a sequential basis. Manufactured products that saw a spike were textiles, chemicals, metal products, electrical equipment and motor vehicles. However, food products, computers and optical products saw prices tapering.

On a sequential basis, the overall WPI inflation was down -0.35%. In Dec-21, the fuel inflation has tapered but food and manufacturing inflation continues to be sticky. With crude at $84/bbl in the Brent market, upside risks to inflation are still substantial.