WPI inflation eases further to 1.31% in August, as fuel basket eases

19 Sep 2024 , 02:51 PM

AUG-24 WPI INFLATION EASES FURTHER TO 1.31%

The wholesale price index (WPI) inflation for August 2024 eased further to 1.31%. Over the last 2 months, the WPI inflation has eased from a high of 3.43% to 1.31%, a fall of 212 basis points. It may be recollected that in June 2024, the WPI inflation had touched a 16-month high of 3.36% (later revised to 3.43%). However, like in July, even in August 2024 a higher base helped WPI inflation to inch lower. The fall of 212 bps in WPI inflation in the last 2 months is largely on account of the higher base effect, and hence needs to be taken with a pinch of salt. WPI inflation was persistently in the negative between April 2023 and October 2023. However, since November 2023, the WPI inflation has been in positive territory.

If you look back at 2024, between February 2024 and June 2024, the WPI inflation was persistently higher in each successive month and had surged in the process from 0.20% to 3.43%. In early 2024, the surge in WPI inflation was an outcome of the spike in the food component of WPI inflation while the manufacturing inflation had turned around from negative to positive. In August 2024, the big relief for WPI inflation came from the food and primary basket, largely on account of normalization of rainfall and its spread. This is likely to keep Kharif output robust in 2024 and keep inflation in check. This month, the WPI inflation also got support from tapering crude prices globally, amidst an expected supply glut.

WHAT WE READ FROM THE WPI INFLATION 6-MONTH TREND?

One effective method to understand WPI inflation trends is by looking at a time series data. Here is a quick look at how the WPI inflation evolved over the last 6 months.

• Between March 2024 and August 2024, the overall WPI headline inflation moved from 0.26% to 1.31%; after touching a high of 3.43% in the month of June 2024.
• Let us first look at the primary basket. The inflation in the primary basket tapered lower from 4.57% to 2.42% between March and August 2024. In fact, inflation in the primary basket peaked at 9.2% in June but fell to 3.08% and 2.42% in July and August 2024.
• The good news is that within the primary basket, the food basket has shown a distinct downtrend since the last two months. Between March and June 2024, food inflation spiked from 7.05% to 11.14%; but has since fallen to 3.45% in July and further to 3.11% in August 2024. It has been a major driver of lower WPI inflation since June.
• Let us look at the break-down of the food basket. Between March 2024 and August 2024, the food inflation fell from 7.05% to 3.11%. However, there were still some sticky candidates in the food basket. For instance, between March and August, pulses inflation edged up from 17.18% to 18.57%, potatoes inflation edged up from 58.43% to 77.96% while onions were up from 56.48% to 65.75%. Fruits also bounced from negative to positive. Rest of the items saw inflation tapering.
• Let us now move to the trend in the fuel basket. Between March 2024 and August 2024, the fuel and power index moved up –2.75% to -0.67%, with a sharp fall of 239 bps over July 2024. The bounce in price was most pronounced in LPG and high speed diesel (HSD).
• Let us move to the trend in the manufacturing basket. Between March 2024 and August 2024, the manufactured products inflation has turned around from -0.85% to 1.22%. This spike in manufacturing inflation is indicative of the gradual rise in the cost of inputs, and that has implications for cost of production. High cost of funds is also one reason.
• It must be noted here that the manufacturing basket has the highest weightage of 64.23% in the WPI calculation. Within the manufacturing basket, the sectors that saw rise in prices over last 6 months were food products, textiles, wearing apparel, paper products, chemicals, pharmaceuticals, and basic metals. The sectors that saw fall in prices in these 6 months were tobacco products, leather products, and wood products.

The last 9 months since November 2023 saw WPI inflation stay in the positive zone and even touch a 16-month high in June. However, WPI inflation has tapered in July and August and that is good news for manufacturing sector.

DID THE BASE EFFECT HELP WPI INFLATION TO TAPER?

The table below captures the trend of CPI inflation and WPI inflation over the last one year. These are yoy numbers as reported each month; with revisions.

Month	WPI Inflation (%)	CPI Inflation (%)
Jul-23	-1.23%	7.44%
Aug-23	-0.46%	6.83%
Sep-23	-0.07%	5.02%
Oct-23	-0.26%	4.87%
Nov-23	0.39%	5.55%
Dec-23	0.86%	5.69%
Jan-24	0.33%	5.10%
Feb-24	0.20%	5.09%
Mar-24	0.26%	4.85%
Apr-24	1.19%	4.83%
May-24	2.74%	4.80%
Jun-24	3.43%	5.08%
Jul-24	2.04%	3.60%
Aug-24	1.31%	3.65%

Data Source: Office of the Economic Advisor

The monthly WPI data for the last one year demonstrates that WPI inflation turned around to positive in November 2023 after being negative for 7 months in a row from April 2023 to October 2023. WPI inflation has been persistently in the positive since November 2023. During this period, WPI inflation touched a 16-month high of 3.43% in June 2024; but has since tapered by a full 212 bps to 1.31% in August 2024. There is a more critical base effect at play in this entire story. For example, between July 2023 and August 2023, the base WPI inflation deepened actually hardened from further from -1.23% up to -0.46% resulting in a sharp fall in the WPI inflation in August 2024, extending the July trend. This trend could continue for another couple of months, before the base effect wears out.

Last year in June 2023, the WPI inflation had bottomed out at -4.18% before gradually rising and getting back into positive territory. That base advantage is likely to last for just another two months, after which it is likely to normalize. Let us now turn to the revisions of previous WPI data, which is normally done when new data points emerge. Based on additional data points, the final WPI inflation for June 2024 has been revised upwards by 7 basis points from 3.36% to 3.43%. The one thing to be cautious about is the impact of rising manufacturing inflation on input costs of Indian companies. That can get arrested if the RBI turns dovish.

WPI INFLATION (YOY) SHIFTS IN AUGUST 2024

Here is a quick snap of the break-up of WPI inflation and its 3 major components viz. primary products basket, fuel & power basket, and the manufacturing products basket for the last 3 months in a row. Manufacturing has the highest weightage of 64.23%.

Commodity Set	Weight	Aug-24 WPI	Jul-24 WPI	Jun-24 WPI
Primary Articles	0.2262	2.42%	3.08%	9.20%
Fuel & Power	0.1315	-0.67%	1.72%	0.48%
Manufactured Products	0.6423	1.22%	1.58%	1.50%
WPI Inflation	1.0000	1.31%	2.04%	3.43%
Food Basket	0.2438	3.26%	3.55%	8.91%

Data Source: Office of the Economic Advisor

Here are some of the key takeaways from the above table in terms of the 3-month yoy WPI inflation trend.

• The headline WPI inflation on a yoy basis at 1.31% has been helped by sobering of all the three baskets. During the period, the primary articles basket has moved from 9.20% to 2.42% while its subset, the food basket, has moved from 8.91% to 3.26%. it is not just about the weightage, but about food being the actual swing factor in WPI inflation.
• The other two baskets have also shown a falling trend between June and August 2024. Let us first look at the fuel & power basket. Fuel & Power wholesale inflation has gone down from 1.48% to -0.67%. This is largely due to the sobering of global crude oil prices from $90/bbl to $70/bbl on supply glut concerns.
• Even the all-important manufacturing inflation has gone down from 1.50% to 1.22% in the last 3 months, clearly hinting at some sobering of producer inflation and manufacturing costs for Indian corporates. That will eventually translate into lower CPI.

HIGH FREQUENCY WPI INFLATION SHIFTS IN AUGUST 2024

The yoy inflation above is vulnerable to the base effect. One alternative is to look at the high frequency MOM WPI inflation; which captures short-term trends more effectively.

Commodity Set	Weight	Aug-24 WPI	Jul-24 WPI	Jun-24 WPI
Primary Articles	0.2262	-1.37%	2.76%	2.23%
Fuel & Power	0.1315	0.14%	0.68%	-2.13%
Manufactured Products	0.6423	-0.07%	-0.21%	0.00%
WPI Inflation	1.0000	-0.45%	0.78%	0.33%
Food Basket	0.2438	-1.13%	2.46%	2.36%

Data Source: Office of the Economic Advisor

Let us quickly look at how the MOM WPI inflation provides better insights into the short term trends in WPI inflation. Here is a summary.

• Primary Articles basket (22.62% weight) declined by -1.37% in August over July 2024. Within the primary articles basket, the downside triggers came from the prices of minerals (-2.66%), crude petroleum and natural gas (-1.84%), and food articles (-1.83%). On the other hand, upside pressure came from non-food articles (+1.65%).
• Fuel & Power basket (13.15% weight) edged up by 0.14% on an MOM basis in the month of August 2024, compared to July 2024. The upward thrust in the basket came from electricity (+1.59%), while the downward pressure came from mineral oils (-0.32%) in the month of August 2024, as compared to July. The price of coal did not witness any change in the month compared to the previous month.
• Manufactured Products basket (64.23% weight) fell by -0.07% in the month of August over July 2024. Out of the 22 NIC two-digit groups for manufactured products, 12 groups saw an increase in prices, 7 groups saw decrease in prices and 3 groups witnessed no change in prices. Key groups that showed MOM increase in prices include the manufacture of food products; fabricated metal products, motor vehicles / trailers / semi-trailers, machinery & equipment, paper, and paper products. Among the portions of the basket that saw decrease in prices were the manufacture of basic metals, non-metallic mineral products, chemicals, chemical products, and textiles. All these pertained to August over July 2024.

The overall MOM WPI basket had dipped into negative in the month of August largely on account of the negative MOM price movement in the food and the primary articles basket.

WPI BASKET – BIG SWING FACTORS IN AUGUST 2024

What do we mean by swing factors? These swing factor are the drivers that actually trigger the shift in the major index. It is not just about weightage, but about the extent of the movement and the overall impact on WPI inflation due to direct and indirect externalities. The table below captures the Swing factors in WPI basket on the upside and on the downside. The left hand side (LHS) looks at positive drivers; while right hand side (RHS) looks at negative drivers for WPI inflation. All shifts are on a yoy basis.

Commodity	WPI Inflation	Commodity	WPI Inflation
Potatoes	77.96%	Vegetables	-10.01%
Onions	65.75%	Cement, Lime, Plaster	6.98%
Pulses	18.57%	Oil Seeds	-5.38%
Fruits	16.69%	Petrol	-4.23%
LPG	14.40%	Non-metallic Mineral Products	-3.85%
Paddy	9.12%	High Speed Diesel (HSD)	-3.03%
Minerals	8.76%	Semi-finished Steel	-2.40%
Cereals	8.44%	Fabricated Metal Products	-1.51%
Wheat	7.28%	Crude Oil & natural gas	-0.98%
Tobacco Products	3.65%	Basic Metals	-0.78%

Data Source: Office of the Economic Advisor

The story of the WPI inflation is now divided into 2 parts. On the left hand side (LHS) are the products with positive WPI inflation ; that are driving the yoy WPI inflation higher. Not surprisingly, most of the pressure on WPI inflation is coming from food product basket or the agricultural basket. In fact, 8 out of the 10 swing products are from the agricultural and food basket. Out of the remaining two (minerals and LPG), the former is part of the primary basket, so still most of the pressure is coming from the primary basket only. What about the commodities putting downward pressure on the WPI inflation? Out of the 10 top negative swing drivers of WPI inflation, only 1 is an agricultural product, and crude oil is from the primary basket. All the others are from the manufacturing basket only. Clearly, WPI containment continues to come from the manufacturing basket only.

OUTLOOK FOR FISCAL FY25 WPI INFLATION?

For FY25, we now have 5 months of WPI data. That would give a rough idea of the full-year extrapolation, although the overall picture is still evolving. For the first 5 months of FY25, the WPI inflation stands at 2.14%, compared to -2.07% in the corresponding first 5 months of FY24. Clearly, the comparable WPI inflation is 421 bps higher compared to the previous financial year and that is not too surprising, since the shift from negative WPI inflation to positive WPI inflation happened only effective from November 2023. However, some basic insights are already there and let us look at how the distribution looks like. For FY25 (5 months data), the cumulative WPI inflation stands at 2.14%. The real upward pressure on WPI inflation in FY25 is coming from the primary basket, which has moved up from 2.37% to 5.38% on yoy basis. Both food and non-food articles have contributed to a spike in primary inflation in FY25, although non-food articles in the primary basket like oil seeds and crude petroleum made the biggest contribution to the spike in the primary basket.

Fuel & Power inflation for FY25 has bounced sharply from -8.13% to 0.32% on yoy basis, but the real signs of trouble are visible in the manufacturing basket. Here is why. For FY25 till date (Apr-Aug), manufacturing basket inflation has spiked from -2.60% to 1.03%; an increase of 363 bps yoy. That means cost-push inflation could be real in FY25 and that is an important cue for RBI. RBI must appreciate that the lead indicator of manufacturing inflation and could be a key trigger for the RBI to cut the repo rates. For now, the focus would be on what the Fed does on in September 2024.