WPI inflation falls sharply in July 2022 to 13.93%

After a long time, there was some real good news on the WPI inflation front. The wholesale price index (WPI) inflation captures the producer inflation, unlike the CPI which captures the consumer inflation. The WPI inflation is a much better measure when it comes to looking at supply chain issues and trying to understand cost push inflation. Over the last 3 months, the CPI inflation has tapered by 108 basis points. Now even the WPI inflation has tapered by a full 270 points over 2 months from 16.63% for May 2022 to 13.93% for July 2022.

A better picture will emerge if we look at the trend in WPI inflation over the past few months. Between February 2022 and May 2022 WPI inflation had surged 320 bps from 13.43% to 16.63%. In comparison, the WPI inflation fell to 15.18% in June 2022 and has eventually dropped to 13.93% in July 2022. However, this also marks the 16th consecutive month that the WPI inflation has stayed above double digits. So, while the falling WPI inflation is surely laudable, the absolute figure still remains high. What were the drivers?

Data Source: Office of the Economic Advisor

There is an important distinction between CPI inflation and WPI inflation. For instance, in CPI inflation, the highest weightage is assigned to the food basket, which is almost 45% while WPI inflation assigns the highest weightage of 64.23% to manufactured products. WPI inflation, therefore, is a much better measure of producer costs. The fall in WPI inflation from the high of May 2022 is significant because the WPI inflation of 16.63% reported in May 2022 marked a 31-year high inflation level. War has worsened the WPI inflation.

How did components of WPI inflation pan out in July 2022? Manufacturing inflation yoy fell steadily from 11.39% in April 2022 to 8.16% in July 2022. With the weightage of 64.23% assigned to manufacturing, the WPI inflation has been kept in check. However, fuel inflation in July surged to 43.2% with specific products like petroleum and natural gas at 65.84%. The million dollar question is why oil inflation is higher despite falling crude prices and cheaper oil imports from Russia. It is not just a yoy problem as even sequential inflation is up 6.56%.

MOM inflation gives a better WPI picture

Till now we have spoken about inflation on a yoy basis. Since high frequency data captures the impact of RBI hawkishness better, we also look at the MOM figure of WPI inflation. 

    • On MOM basis, the headline WPI inflation for July 2022 fell by -0.13%, so momentum is consistently tapering. 

    • In the primary basket, fall in mining inflation is much sharper. Hopefully, the a decent Kharif output this season should taper wholesale food prices also.

    • Like in June 2022, even July 2022 saw manufacturing inflation in negative zone at -0.42% on MOM basis.

    • Amidst a tapering WPI story, the sole exception was fuel inflation, which is up by 6.56% in July 2022, and that is still showing pricey momentum.
 

How will RBI interpret the WPI inflation data?

Now the RBI has 2 data points to justify its hawkishness on rates. CPI inflation has fallen from 7.79% to 6.71% over the last 3 months. On the other hand, WPI inflation has fallen from 16.63% to 13.93% over the last 2 months. This is on the back of 140 bps rate hike between May and August 2022, although the August rate hike impact is not factored into these numbers. However, the direction is positive and RBI will take solace from that. In the current context, RBI was specifically awaiting WPI data before crystallizing rate view.

Ahead of the October MPC meet of the RBI, it has more data points on CPI, WPI and even IIP growth. That will give the RBI the luxury of a more consolidated view. If August inflation also maintains the downward journey, RBI will most likely go slow on hawkishness. For now, the focus will shift to the Fed minutes on 17th August and RBI MPC minutes on 19th August.