WPI Inflation for November 2022 comes in at 21-month low

The big story in the last few months in India has been the rapid fall in the WPI inflation. Now, WPI inflation is also called producer inflation and looks at inflation from the producer perspective. While the RBI hiked rates by 225 bps in the last 6 months, the impact has been limited on CPI inflation but deep on WPI inflation. Today, the fall in WPI inflation has been so sharp that it is now almost at par with CPI inflation. You can check the table below. Between February 2022 and May 2022 wholesale price inflation (WPI) had risen sharply by 320 bps from 13.43% to 16.63%. However, between May 2022 and November 2022, WPI inflation fell sharply from 16.63% to 5.85%; a fall of 1,078 basis points to a 21-month low.

CPI inflation versus WPI inflation compared

Data Source: Ministry of Finance Estimates

Looking at the above table should give a lot of hope and solace to the Monetary Policy Committee (MPC) of the RBI. That is because; even though the impact on CPI inflation has been limited, the impact on WPI inflation has been really sharp. The good news is that the WPI inflation has reacted sharply to the rate hikes. CPI inflation is a lag indicator so it should follow suit. In 2022, WPI inflation got impacted by a plethora of factors like the Ukraine war, sanctions on Russia, zero-COVID lockdowns in China and central bank hawkishness. In addition, the high input cost inflation and pressure on cost of funds added to the stress.

The story of WPI inflation in the last 3 months

The table below captures the flow of WPI inflation over the last 3 months with the weights and the key categories of WPI inflation.

Here is the gist of the WPI inflation story for November 2022.

1. The fall in WPI inflation has been uniform across categories and baskets. Manufacturing inflation fell from 6.12% in September 2022 to 4.42% in October and further to 3.59% in November 2022. This basket has a weight of 64.2% and has the biggest impact.
    

2. Food inflation and energy inflation have also been tapering amidst a global commodity correction. Food inflation fell from 8.02% to 2.17% in last 3 months while the fuel inflation has fallen from 33.11% to 17.35%.
    

3. Highest producer inflation was visible in HSD at 42.10% followed by crude oil at 33.87%, wheat 18.11%, potatoes at 13.75%, cereals 12.85%, paper products at 8.31% and mineral products at 7.10%.
    

4. In terms of products with negative WPI inflation in November, it was vegetables contracting at -20.08%, Onions at -19.19%, LPG lower by -13.40% and vegetable oils lower by -5.10% helping to keep overall WPI inflation in check.
    

5. From current levels, there are 3 key risks to the WPI inflation. Firstly, higher cost of funds is already imposing a higher financial cost on companies. Secondly, crude market could see disruption if the EU deepens its sanctions on Russia. Currently, Russia is selling surplus crude to India and China, but that may not continue for a long time. Thirdly, there is a wager that despite a weak Kharif Rabi should be good.

What does the RBI do now?

RBI should actually be delighted to see WPI inflation falling over 10 percentage points since the May peak as it is a strong lead indicator of the future direction of CPI inflation. WPI inflation shows how inflation targeting works in practice indirectly and has an impact on the CPI inflation. The real concern for the RBI today is that high cost of funds is putting pressure on the interest coverage ratio and rural demand is under a lot of pressure. Growth via consumption needs low cost of funds and adequate liquidity, which is not possible if the posture is of anti-inflation. It is high time; RBI shifts focus from inflation towards growth.