WPI INFLATION TOUCHES 3 MONTH HIGH AT 0.53% IN MARCH 2024
The wholesale price index (WPI) inflation for March was announced on Monday at 0.53%. There were two things significant about this reading. Firstly, it is the highest level of WPI inflation seen in the last 3 months. Secondly, if you consider the last 12 months, this is second highest level of WPI inflation witnessed by India. March 2024 marks the fifth month in a row, the WPI inflation remained in positive territory. Of course, this comes after 7 consecutive months of negative WPI inflation between April and October 2023. However, since November 2023, WPI inflation has been positive.
The March report for WPI inflation also reported the full year WPI inflation for FY24 (for the April-March period). Despite the surge in March inflation, the WPI inflation for the full year FY24 remained subdued at -0.25%. The negative inflation for FY24 is because the first 7 months of FY24 saw negative inflation with the WPI inflation turning positive only since November 2023. The full year FY24 WPI inflation of -0.70% is sharply lower than the 6.52% WPI inflation reported by India for FY23. This has been one of the key factors contributing to higher profitability of Indian corporates amidst sharply lower input costs in this fiscal year.
WHY IS CPI INFLATION SO MUCH HIGHER THAN WPI INFLATION?
One question that would logically perturb reads is why the CPI inflation has been perpetually higher than the WPI inflation for such a prolonged period? One way to look at this hiatus is that there is rising pressure building up on households and individuals, while boosting corporate margins. That is the simplest interpretation of low WPI inflation and high levels of CPI inflation. That is because, the headline CPI inflation in India has been largely driven by food prices, while the WPI inflation has been driven by commodity prices, which has been a key factor in robust corporate margins this year. In FY24, cheaper raw materials and cheaper fuel have been a big driver of subdued WPI inflation, which explains the full year FY24 WPI inflation at -0.70%, in contrast to 6.52% in FY23. Another reason for this divergence is the weighting pattern. For instance, CPI inflation is dominated by food, while WPI inflation is dominated by manufacturing, which was a beneficiary of lower input costs.
Let us look at some of the comparative numbers. In the food basket, the spike in CPI inflation came from cereals, spices, and dairy & high protein products. While CPI gives a 40% weight to food, WPI assigns a weightage of just 15.2% to food. In 2023, after the sub-normal monsoons gave an upward thrust to the prices of cereals and vegetables. Also supply chain constraints impacted the supply of spices and dairy products. Not surprisingly, the CPI inflation has sharply diverged from CPI inflation. Fuel has been another major factor. Brent crude prices may have touched $90/bbl, but it is still lower on a yoy basis. That has helped WPI inflation to remain subdued. In the coming months, as this dichotomy gradually reduces, the CPI inflation and WPI inflation are likely to be more aligned.
STORY OF WPI AND CPI IN LAST 1 YEAR
The table below captures the trend of CPI inflation and WPI inflation over the last one year. These yoy numbers as reported each month.
| Month | WPI Inflation (%) | CPI Inflation (%) |
| Mar-23 | 1.34% | 5.66% |
| Apr-23 | -0.79% | 4.70% |
| May-23 | -3.61% | 4.25% |
| Jun-23 | -4.18% | 4.81% |
| 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 | 0.27% | 5.10% |
| Feb-24 | 0.20% | 5.09% |
| Mar-24 | 0.53% | 4.85% |
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 in negative zone for 7 months in a row in FY24. In the month of March, the pressure is not coming so much from food and primary basket but from the hardening of negative inflation in manufacturing and fuel. There is also the base effect at play. Between February 2023 and March 2024, the base WPI inflation fell from 3.85% to 1.34% resulting in a spike in the WPI inflation in the current month of March 2024.
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 January 2023 has been revised upwards by 6 bps from 0.27% to 0.33%. This raises the possibility that the WPI inflation for February 2024 and March 2024 could also be revised higher when the respective revised numbers are published after factoring in additional data points.
KEY DRIVERS OF WPI INFLATION (YOY) FOR MARCH 2024
Here is a quick dekko at the break-up of WPI inflation, and a look at its 3 major components viz. primary products basket, fuel & power basket, and the manufacturing products basket. Manufacturing has the highest weightage of 64.23%.
| Commodity Set | Weight | Mar-24 WPI | Feb-24 WPI | Jan-24 WPI |
| Primary Articles | 0.2262 | 4.51% | 4.49% | 4.07% |
| Fuel & Power | 0.1315 | -0.77% | -1.59% | -0.45% |
| Manufactured Products | 0.6423 | -0.85% | -1.27% | -1.20% |
| WPI Inflation | 1.0000 | 0.53% | 0.20% | 0.33% |
| Food Basket | 0.2438 | 4.65% | 4.09% | 3.85% |
Data Source: Office of the Economic Advisor
Between November 2023 and February 2023, the shifts in WPI inflation were largely driven by the vicissitudes of the food basket. However, in March 2024, the shift in WPI inflation is not driven by food, but by the hardening negative inflation in manufacturing and fuel. Food WPI inflation has been flat. Between November 2023 and March 2024, primary articles (comprising of mining and food crops) saw WPI inflation tapering from 5.73% to 4.07%. In the same period, fuel inflation hardened from a level of -1.39% to -0.77%, while manufacturing basket also went deeper into negative from the level of -0.78% to -0.85%, albeit higher than previous months. Low fuel inflation is an outcome of OMCs holding the prices artificially since May 2022 and recent cuts in diesel and petrol by ₹2 per litre.
HIGH FREQUENCY (MOM) WPI INFLATION SPIKES IN MAR-24
The yoy inflation we have seen till now is vulnerable to the base effect. That is why the high frequency MOM WPI data captures short-term trends best. Here is a quick look at how the MOM WPI evolved in the last 3 months.
| Commodity Set | Weight | Mar-24 WPI | Feb-24 WPI | Jan-24 WPI |
| Primary Articles | 0.2262 | 0.94% | 0.00% | -0.77% |
| Fuel & Power | 0.1315 | 0.06% | 0.13% | -0.58% |
| Manufactured Products | 0.6423 | 0.21% | 0.07% | -0.21% |
| WPI Inflation | 1.0000 | 0.40% | 0.00% | -0.40% |
| Food Basket | 0.2438 | 1.01% | 0.11% | -1.00% |
Data Source: Office of the Economic Advisor
Let us quickly look at how the WPI inflation on a MOM basis provides much deeper insights into the short term high frequency trends in the wholesale inflation. Here is a summary.
High frequency WPI inflation gives a quick picture of where the short term trends are, and for now it looks like the trend of hardening WPI inflation is here to stay.
WPI BASKET – SWING FACTORS IN MARCH 2024
Swing factor are key drivers of WPI inflation (on the upside and downside). Since July 2023, there has been pressure on food basket as erratic monsoons and intermittent floods resulted in lower Kharif output. In 2023, Rabi could not offset the Kharif shortfall. The table captures the Swing factors in WPI basket on both sides. The left side looks at positive drivers; while the right side looks at negative drivers for WPI inflation (YOY).
| Commodity | WPI Inflation | Commodity | WPI Inflation |
| Onions | 56.99% | Liquefied Petroleum Gas (LPG) | -10.19% |
| Potatoes | 52.96% | Animal oils and fats | -8.04% |
| Vegetables | 19.52% | Mild Semi-Finished Steel | -7.22% |
| Pulses | 17.24% | Paper & Paper Products | -5.71% |
| Paddy | 11.74% | Basic Metals | -5.34% |
| Crude Petroleum | 10.26% | Chemicals & Chemical Products | -4.64% |
| Wheat | 7.43% | High Speed Diesel (HSD) | -3.51% |
| Milk | 4.73% | Fruits | -2.95% |
| Wood & Wood Products | 4.48% | Fabricated Machinery | -1.87% |
| Tobacco Products | 3.84% | Cement, Lime, and Plaster | -1.81% |
Data Source: Office of the Economic Advisor
The story of the WPI inflation is now divided into two narratives, which are captured on the LHS and RHS of the above table. On the left side, it is largely the food product and some global natural commodities that are exerting upward pressure on the WPI basket. Out of the top 10 upward drivers of WPI inflation, 8 are agricultural and food products, 1 is a commodity and only 1 is a manufactured product. Out of the 10 top negative swing drivers of WPI inflation, 2 are agricultural and food products, 2 is a mineral commodity and the remaining 6 are manufactured products.
How does the picture for FY24 looks, now that we have the full year data for FY24? If you consider the full FY24 from April 2023 till March 2024, then the overall WPI inflation is in the negative zone at -0.70%, as compared to 6.52% in FY23 fiscal year. That is understandable as 7 out of the 12 months in FY24 have seen negative WPI inflation between April 2023 and October 2023. Among the components, primary articles reported cumulative WPI inflation at 3.53%, but there was a clear dichotomy. Food articles inflation came in at 6.58% cumulative for FY24 while inflation in non-food primary articles was negative at -5.61%. If you look at fuel & power, the cumulative WPI inflation for FY24 stands at -7.79%, which could have been triggered by the cut in petrol and diesel prices. Finally, in the manufacturing basket, the WPI inflation for FY24 stands at -1.69%. The negative thrust is largely coming from primary manufacturing sectors like vegetable oils, wood products etc; apart from textiles, basic metals, and metal fabrication products.
WILL MARCH WPI INFLATION CHANGE RBI RATE STRATEGY?
The RBI has been on halt mode since February 2023 and has held rates at 6.5% for 7 meetings in a row (including April 2024) MPC meet. The RBI action, combined with falling input costs, has helped GDP growth pick up. Q3 GDP grew 8.4% and FY24 is now pegged at closer to 8%. The inflation has shown a steady trend of coming down in last one year, but the last mile continues to be challenging and food inflation is the joker in the pack. The RBI would be content that inflation is just about 85 bps away from the RBI target of 4%; so drastic action is really not called for at this juncture. Muted inflation and robust growth, gives RBI the luxury to be on wait-and-watch mode. While there are chances that the RBI could surprise the street with a rate cut, the markets must not factor in these expectations into their calculations. For now, the assumption should still be that the RBI would evaluate any rate cuts only after the full budget in July 2024. So, the RBI rate strategy is unlikely to change for now.
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