WPI Inflation tapers to 12.43%, but will it change RBI narrative?

Back in June 2022, when the wholesale price index (WPI) inflation in India had touched 16.23%, all hell had broken loose. However, over the next 2 months between June and August the WPI inflation has progressively come down to 13.93% in July 2022 and further down to 12.41% in the month of August. While the WPI inflation still stands at double-digits for over 17 months in succession, this fall in the WPI inflation is surely a gratifying story which shows that the government and RBI initiatives have been able to cut inflation.

Inflation in August 2022 is primarily emanating from a rise in prices of mineral oils, food articles, crude petroleum, natural gas, basic metals, chemicals, electricity and food products. While the overall WPI inflation actually tapered to 12.41% one area of concern would be the food articles inflation spiking to 12.37% in August 2022. Food inflation is up nearly 160 bps yoy. This is similar to the trend witnessed in the US also wherein the food inflation has been going up even as the energy inflation has been tapering. This is supply chain constraints 101.

What are the items that played a key part in the WPI numbers for August 2022. Vegetable prices rose 22.29% in August; higher than the 18.25% growth in July. The price of potato spiked to 43.56% yoy while onion prices slipped. The prices of fruits rallied by 31.75% while the price of protein rich foods like eggs, meat and fish prices rose 7.88%. Even cereals prices rose by 11.77% and that can be largely attributed to the shortfall in Kharif output this year. In short, it is the WPI of the food basket that is really putting the pressure on WPI inflation.
There has been some sobering news from the energy inflation front. For instance, the overall fuel and power inflation eased to 33.67% compared to 43.75%  in the month of July. Similarly, petrol prices eased to 38.68% as compared to 55.30% in the previous month. Even the inflation in high speed diesel (HSD) saw a fall from 72.42% to 60.15%. Even the inflation in the LPG (liquefied petroleum gas) fell from 32% in July 2022 to 19.75% in August 2022. While lower energy prices should have helped more, it was food that played spoilsport.

How is it that WPI inflation is down in August while the consumer inflation is up to 7%. There are 3 reasons. Firstly, the WPI inflation basket is dominated by the manufactured products basket while the CPI inflation is dominated by the food basket. Secondly, there is normally a lag between the fall in WPI inflation and the fall in CPI inflation since the latter does not seamlessly get passed through. Lastly, due to government intervention, CPI inflation had been better regulated and that also explains this difference. For now, the question is what happens to the RBI narrative.

From the RBI perspective, the big issue will not be about just WPI inflation but about the combination of CPI inflation and the risk of forex outflows due to risk-off sentiments. RBI would be keen to keep the rate differential between India and the US so that there is no run on the debt by FPIs. With the Fed likely to raise rates by another 75 bps in September, the RBI is also likely to follow suit. Since food inflation and core inflation is still sticky, the RBI would look to target a terminal repo rate of 6.5% rather than 6%. For now, hawkishness will stay at the RBI and rate hikes would be still on.