WPI inflation comes in lower at 15.18% in June 2022

Just a couple of days back, the retail CPI inflation came in marginally lower at 7.01%. Unlike in May 2022, the WPI inflation has also followed a downward path, falling 70 bps from 15.88% in May 2022 to 15.18% in June 2022. However, this is on the back of a WPI surge of 277 bps between February 2022 and May 2022. However, it must be remembered that this 15.18% WPI inflation in June 2022 is on a relatively high base of 12.07% in June 2021.

Unlike CPI inflation which is more food intensive, WPI inflation is more manufacturing intensive. WPI inflation assigns a weight of 64.23% to manufactured products. As a result, it becomes a better measure of producer costs and supply side driven inflation. That is more relevant in the current scenario. Even from a policy perspective, the RBI would actually breathe a lot more easy only when WPI inflation comes down. However, more data points will be needed on the wholesale inflation front, before we can assume tapering of prices.

While WPI inflation for June 2022 did taper from 15.88% to 15.18%, it is still above the 15% mark for the third month in succession. Also, it is the 15ths month in a row that WPI inflation is in double digits. This is despite the extreme hawkishness shown by the RBI. Th other thing is that previous months have seen upward revision of WPI inflation so there is a distinct possibility that June 2022 WPI inflation could also be upped later on.

The good news is on the manufacturing inflation front, which has tapered from 11.39% in April 2022 to 10.11% in May 2022 and further to 9.19% in June 2022. Now, manufacturing has a weightage of 64.23% in the WPI basket and that has helped to keep WPI inflation in June 2022 in check . However, some of the products in the WPI basket are still showing high levels of inflation like crude petroleum at 77.29%, vegetables at 56.75%, LPG at 53.20% and potatoes at 39.38%. With several headwinds, there is a possibility of WPI inflation rising.

The WPI inflation that we normally look at is the yoy inflation. However, it fails to capture the short term momentum. A better measure is the high frequency inflation. There are several interesting data points in the high frequency MOM WPI inflation. Overall WPI inflation for June 2022 was flat at 0.00%, a sharp fall from 2.48% in March 2022. In fact, the manufacturing inflation on a MOM basis dip into negative at -0.76%, falling from 2.45% in March 2022. Even fuel and power inflation has good news, falling from 5.07% to 0.65%.

Going ahead, RBI would be driven by WPI inflation

There has been a certain dichotomy between CPI inflation and WPI inflation. For instance, between April 2022 and June 2022, CPI inflation tapered from 7.79% to 7.01% but WPI inflation only fell from 15.38% to 15.18% with a strong possibility of the June number being upgraded. The RBI action on repo rates and CRR has surely brought down CPI inflation, but the impact on WPI inflation is limited. That is more because, WPI inflation is imported inflation and needs international prices to taper for smoother supply chains.

One big message from the WPI number is that monetary levers may have played their part and may be saturated. Going ahead, fiscal measures will be needed to rein in WPI inflation in a bigger way. Of course, this comes with a dilemma that fiscal measures tend to be more revenue debilitating for the government. That makes it a tough call.