March 2023 WPI inflation falls to 29-month low of 1.34%

18 Apr 2023 , 07:35 AM

From the peak of 16.63% in May 2022, WPI inflation has fallen 1,592 basis points to 1.34% in just 10 months. Each month has been progressively lower. The impact of the rate hike of 250 bps has been a lot more evident on the WPI inflation; albeit not so much on CPI inflation. Against the 1,592 bps fall in WPI inflation, retail inflation is down just 213 basis points from the peak. Retail inflation typically reacts with a lag, to shifts in interest rates while WPI is normally the lead indicator, but we have to wait and see how it works.

Month	WPI Inflation (%)	CPI Inflation (%)
Mar-22	14.63%	6.95%
Apr-22	15.38%	7.79%
May-22	16.63%	7.04%
Jun-22	16.23%	7.01%
Jul-22	14.07%	6.71%
Aug-22	12.48%	7.00%
Sep-22	10.55%	7.41%
Oct-22	8.67%	6.77%
Nov-22	5.85%	5.88%
Dec-22	4.95%	5.72%
Jan-23	4.73%	6.52%
Feb-23	3.85%	6.44%
Mar-23	1.34%	5.66%

Data Source: Office of the Economic Advisor (peak levels are shaded)

WPI inflation has generally been more sensitive and hence the impact of any rate hike is immediately visible in WPI inflation. The impact eventually gets transmitted to CPI inflation with a time lag, through the impact on consumer spending. But that may take some more time due to the relatively robust labour data.

WPI inflation dips to 29-month low in March 2023

Overall WPI inflation is divided into primary articles (mining and crops), manufactured products and fuel & power. Manufactured products have the highest weightage of 64.23% in the WPI basket followed by primary articles at 22.62% and fuel & power at 13.15%. The sharp fall in manufacturing inflation has been a WPI inflation depressant and in March it has dipped into negative zone. Food basket has a weight of 24.38%, but this is partly carved out of primary articles (food crops) and partly out of manufactured products (food products).

Commodity Set	Weight	Mar-23 WPI	Feb-23 WPI	Jan-23 WPI
Primary Articles	0.2262	2.40%	3.28%	4.06%
Fuel & Power	0.1315	8.96%	14.82%	15.00%
Manufactured Products	0.6423	-0.77%	1.94%	3.06%
WPI Inflation	1.0000	1.34%	3.85%	4.80%
Food Basket	0.2438	2.32%	2.76%	3.13%

Data Source: Office of the Economic Advisor

The WPI inflation at 1.34% in March 2023 is the lowest level of WPI inflation seen in the last 29 months; and largely a reaction to persistent RBI rate hikes. Before halting rate hikes in April 2023, the RBI had already hiked rates by 250 basis points in the 9 months prior to that. One key risk to WPI inflation is that higher cost of funds has imposed a steeper financial cost on companies. This could impact cost of funding for Indian companies and impact their solvency. The sharp fall in WPI inflation has been progressively driven by manufacturing inflation and fuel inflation. The fall in WPI inflation in March 2023 is across the board.

What moved WPI inflation in March 2023?

The sharp fall in WPI inflation was across manufactured products and fuel; although the lowering impact was felt across the board. Manufacturing inflation fell from 3.06% in January 2023 to 1.94% in February 2023 and dipped into negative at -0.77% in March 2023. With a weightage of 64.2% in the overall WPI basket, manufacturing had an oversized impact in pulling down WPI inflation. Energy inflation tapered amidst a global commodity correction to just 8.96%, one of the lowest figures seen in the last one year. Food inflation is also lower but the weak Kharif output appears to be showing pressure in specific items.

Commodity	WPI Inflation	Commodity	WPI Inflation
HSD Oil	11.85%	Onions	-36.83%
Cereals	9.48%	Potatoes	-23.67%
Wheat	9.16%	Crude Petroleum	-23.53%
Milk	8.48%	Vegetable & Animal Oils	-21.33%
Paddy	7.54%	Oil Seeds	-15.05%
Petrol	6.48%	Basic Metals	-7.11%
Cement	6.32%	Minerals	-4.98%
Minerals & Metals	5.48%	Textiles	-4.93%
Fruits	4.89%	Semi-finished steel	-4.91%
Wearing Apparel	3.38%	Food Products	-2.96%

Data Source: Office of the Economic Advisor

In terms of specific products, highest producer inflation in March 2023 was in HSD at 11.85% followed by cereals at 9.48%, wheat at 9.16%, Milk at 8.48%, paddy at 7.54%, and petrol at 6.48%. Let us now turn to the negative triggers for WPI inflation in March 2023. For instance, Onions at -36.83%, Potatoes at -23.67%, crude petroleum at -23.53%, Vegetable Oils at -21.33% and oil seeds at -15.05% kept WPI inflation in check. 

What we read in the high frequency WPI inflation numbers?

While WPI inflation is generally presented on YOY basis, the DIPP also presents high frequency MOM picture. That means; like the Bureau of Labour Statistics (BLS) in the US does, the DIPP also gives month-on-month WPI inflation to help track high frequency trends in wholesale inflation. High frequency data matters as it provides critical insights on short term momentum of the inflation number. In a volatile macro environment, the very short term headwinds and tailwinds are best captured by the MOM data on WPI inflation. Here are some key takeaways from the high frequency numbers.

• For March 2023, MOM WPI inflation was absolutely flat and at the same level as February 2023. In 2 out of last 6 months, the MOM WPI inflation has been negative and in March it is neutral. This could indicate WPI inflation near to bottoming out.

   

• Is there MOM pressure on WPI basket? March 2023 sequential WPI inflation is -1.26% lower for fuel & power and it is also -0.28% lower for manufacturing. However, the MOM inflation for the primary basket and the food basket continues to be in the positive, hinting that the weak Kharif has put pressure on inflation.

MOM numbers are a kind of 2-way street. They capture short-term trends better but they also tend to be vulnerable to short term base effects. However, it is a good way to ratify the yoy WPI inflation trend and better capture some very short term trends in the data.

Would the RBI be impressed by the falling WPI?

The answer would be yes and no. WPI inflation is a lead indicator for CPI inflation and to that extent it is an important indicator. The RBI has possibly bet on sharply falling WPI inflation in the hope that CPI inflation will eventually follow it down to the 4% levels. RBI had consistently underlined in the MPC minutes that it would prefer to focus on controlling inflation and inflation expectations rather than worry too much about growth triggers at his point of time. Before the RBI takes decisive action on rates (not a pause), it would wait for the CPI inflation to trend towards the 4% mark. 

One question is whether the RBI decision to hold rates in April is a pause or a shift in thinking? We have to wait for clearer indications from the RBI. However, the RBI has underlined that it is wiling to chart a course that is suited to Indian conditions rather than worry about monetary divergence with the Fed. But, for now, the good news is that wholesale inflation is coming under control and CPI inflation should follow suit. Of course, the RBI surely has a tightrope to contend with. It is caught in a dilemma between falling wholesale inflation, sticky consumer inflation, uncertain growth and rising rates pinching corporate bottom lines. In the April 2023 policy, the RBI has made a start with status quo on rates. Clearly, the falling WPI inflation is not the deciding factor, but it is certainly giving a lot of confidence to the RBI in evaluating a relatively less hawkish path.