WPI inflation eases to 2.04% in July 2024 on higher base effect

16 Aug 2024 , 09:36 AM

JUL-24 WPI INFLATION EASES BY 132 BPS TO 2.04%

The wholesale price index (WPI) inflation for July 2024 eased by a full 134 bps from 3.36% to 2.04%. This is not only lower than the June WPI inflation but also lower than the May 2024 WPI inflation. It may be recollected that in June 2024, the WPI inflation had touched a 16-month high of 3.36%. However, a higher base helped WPI inflation to taper in July. It may be recollected that the WPI inflation was persistently in the negative between April 2023 and October 2023. However, since November 2023, the WPI inflation has been in the positive.

In fact, 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 3.36%. The surge in WPI inflation had come from a spike in the food component of the WPI inflation and manufacturing inflation turning around from negative to positive. The latter is indicative of the fact that the input cost is becoming a challenge for the Indian manufacturing sector. In July 2024, the biggest relief for WPI inflation came from the food and primary basket.

WPI INFLATION TRENDS IN THE LAST 6 MONTHS

One of the best ways to understand WPI inflation trends can be gleaned by looking at a time series data. Here is a quick look at how the WPI inflation evolved over the last 6 months.

• Between February 2024 and July 2024, the overall WPI headline inflation moved from 0.20% to 2.04%; after touching a high of 3.36% in the month of June 2024.
• Let us first look at the primary basket. The inflation in the primary basket moved up from 4.55% to 8.80% between February and June 2024. July 2024 saw the primary basket inflation fall sharply to 3.08%, the lowest level in the last 6 months.
• However, there was a dichotomy in the primary basket. The food basket has not fallen as sharply as the primary basket. Within the primary basket, the food basket inflation has fallen from 7.07% to 3.45% between February and July 2024; while the non-food primary basket had a mixed experience.
• Oilseeds has bounced from -10.43% to -4.26% between February 2024 and July 2024. In the same period, minerals spiked from 3.45% to 6.59% while crude petroleum fell sharply from 16.65% to 9.19%. within the primary basket, the food inflation and petroleum inflation are down while the oilseeds inflation and minerals inflation are actually higher.
• Let us now move to the trend in the fuel basket. Between February 2024 and July 2024, the fuel and power index moved up –1.71% to 1.72%, and this can be largely attributed to the supply chain constraints created by the Red Sea crisis. The bounce in prices was visible across LPG and high speed diesel (HSD) also.
• Let us move to the trend in the manufacturing basket. Between February 2024 and July 2024, the manufactured products inflation has turned around from -1.27% to 1.58%. This spike in manufacturing inflation is indicative of the gradual rise in the cost of inputs, and that has implications for cost of production.
• 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 and wood products.

The last 8 months since November 2023 saw WPI inflation stay in the positive zone and even touch a 16-month high in June, before tapering in July. This can escalate manufacturing costs and have a magnifying impact on inflation.

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	3.36%	5.08%
Jul-24	2.04%	3.54%

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. After touching a 16-month high in June 2024, the WPI inflation tapered in July 2024 by 132 bps to 2.04%, purely on the tapering of the food and primary basket inflation. There is a more critical base effect at play in this entire story. For example, between June 2023 and July 2023, the base WPI inflation deepened actually hardened from further from -4.18% up to -1.23% resulting in a sharp fall in the WPI inflation in July 2024. However, this trend could continue as the base has been getting progressively higher for the next 3 months.

Last year in June 2023, the WPI inflation had bottomed out at -4.18% before gradually rising and getting back into positive territory. Hence, as the base increases, we could see the WPI inflation in the coming months also trending lower. 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 May 2024 has been revised upwards by 13 basis points from 2.61% to 2.74%. The one thing to be cautious about will be the impact of rising manufacturing inflation on input costs of Indian companies. That may also concern the RBI and it could influence how the RBI goes about its rate decision.

WPI INFLATION (YOY) SHIFTS IN JULY 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	Jul-24 WPI	Jun-24 WPI	May-24 WPI
Primary Articles	0.2262	3.08%	8.80%	7.42%
Fuel & Power	0.1315	1.72%	1.03%	1.01%
Manufactured Products	0.6423	1.58%	1.43%	1.00%
WPI Inflation	1.0000	2.04%	3.36%	2.74%
Food Basket	0.2438	3.55%	8.68%	7.75%

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 2.04% appears to be moving in tandem with primary articles basket. During the period, the primary articles basket has moved from 7.42% to 3.08% while its subset, the food basket, has moved from 7.75% to 3.55%. it is not just about the weightage, but about food being the swing factor in WPI inflation.
• The other two baskets continue to show a rising trend between May and July 2024. Let us first look at the fuel & power basket. Fuel & Power wholesale inflation has gone up from 1.01% to 1.72%. This partially due to the low base effect and partially due to the impact of the unrest in the Middle East and West Asia.
• Even the all-important manufacturing inflation has gone up from 1.00% to 1.58% in the last 3 months, clearly hinting at pressure on the costs of funds of corporates and a spike in manufacturing costs. This is what eventually translates into CPI inflation, with a lag.

HIGH FREQUENCY MOM WPI INFLATION SHIFTS IN JULY 2024

The yoy inflation is fairly vulnerable to the base effect. One alternative is to look at the high frequency MOM WPI inflation. MOM inflation captures short-term trends better.

Commodity Set	Weight	Jul-24 WPI	Jun-24 WPI	May-24 WPI
Primary Articles	0.2262	3.13%	1.86%	0.53%
Fuel & Power	0.1315	0.14%	-1.60%	-0.86%
Manufactured Products	0.6423	-0.14%	-0.07%	0.57%
WPI Inflation	1.0000	0.84%	0.26%	0.39%
Food Basket	0.2438	2.68%	2.15%	0.92%

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, which has a weight of 22.62%, saw the group index increasing by 3.13% in July 2024 as compared to June 2024. The prices of food articles (3.90%), crude petroleum & natural gas (1.22%), minerals (1.01%), and non-food oil-seeds (0.90%) increased in July 2024 as compared to June. There were no categories in the primary basket that saw lower MOM inflation in July 2024.
• Let us now turn to the fuel and power basket; which has a weight of 13.15% in the WPI basket. The index for fuel & power group increased by 0.14% in July 2024. In terms of key drivers of the move, prices of mineral oils (1.09%) increased in July 2024 as compared to May, 2024. Other MOM movements were not too significant.
• Let us finally turn to manufactured products, which carries the highest weightage of 64.23%. The index for this major group fell MOM by -0.14% in July 2024. Within manufacturing; Out of the 22 groups classified under manufactured products, 13 groups witnessed increase in prices and 9 groups saw lower prices in July 2024. Some of the key groups that showed MOM increase in prices included chemicals & chemical products, food products, fabricated metal products, textiles; and other manufacturing items. At the same time, some of the groups that saw decrease in prices were basic metals, non-metallic mineral products, electronic & optical products, machinery & equipment, and furniture. These refer to MOM moves in July over June 2024.

Apart from these, the food basket (a sub-set of primary basket) also spiked by 3.55% MOM in the month of July 2024. Needless to say, the maximum pressure has come on high frequency inflation from the primary basket.

WPI BASKET – BIG SWING FACTORS IN JULY 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
Onions	88.77%	Vegetables	-8.93%
Potatoes	76.23%	Cement, Lime, Plaster	-5.46%
Pulses	20.27%	Oil Seeds	-4.26%
Fruits	15.62%	Non-metallic mineral products	-3.05%
Paddy	10.98%	Mild & Semi-Finished Steel	-2.45%
Crude Petroleum	9.19%	High Speed Diesel (HSD)	-1.65%
Cereals	8.96%	Egg, Meat, and Fish	-1.59%
Wheat	7.00%	Fabricated Metals	-1.52%
Minerals	6.59%	Leather & Leather Products	-0.95%
LPG	6.06%	Paper & Paper Products	-0.57%

Data Source: Office of the Economic Advisor

The story of the WPI inflation is now divided into 2 key narratives. On the left hand side (LHS) are the products 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. The remaining two (minerals and crude petroleum) are also from the primary basket; so that is the basket that is causing all the short term swing in WPI inflation. What about the commodities putting downward pressure on the WPI inflation? Out of the 10 top negative swing drivers of WPI inflation, 3 are agricultural products, while the remaining 7 items are manufactured products. WPI containment continues to come from manufacturing.

OUTLOOK FOR FISCAL FY25 WPI INFLATION?

For FY25, we now have 4 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 4 months of FY25, the WPI inflation stands at 2.33%, compared to -2.46% in the corresponding first 4 months of FY24. Clearly, the comparable WPI inflation is 479 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 in November 2023. However, some basic insights are already there and let us look at how the distribution looks like. For FY25 (4 months data), the cumulative WPI inflation stands at 2.33%. The real upward pressure on WPI inflation in FY25 is coming from  the primary basket, which has moved up from 1.28% to 6.06% on yoy basis. Both food and non-food articles have contributed to a spike in primary inflation in FY25, although crude petroleum appears to be the biggest contributor of higher WPI.

Fuel & Power inflation for FY25 has bounced sharply from -8.57% to 0.71% on yoy basis, but the real signs of trouble are visible in the manufacturing basket. For FY25 till date (Apr-Jul), manufacturing basket inflation has spiked from -2.67% to 0.96%. That means cost-push inflation could be real in FY25 and that is an important cue for RBI. Forget about food inflation and core inflation. This is the biggest lead indicator of manufacturing inflation and could be a key trigger for the RBI to cut the repo rates when it meets in October 2024. We have to wait for the MPC meet to hear the real story!