Hawkishness working as WPI Inflation falls 600 bps in five months

Hawkishness working as WPI Inflation falls 600 bps in five months
Hawkishness working as WPI Inflation falls 600 bps in five months

Indian Market
by 5paisa Research Team Last Updated: 2022-10-17T17:10:25+05:30

On Friday, when the Office of the Economic Advisor announced the WPI inflation, there was some room for cheer. CPI inflation may not have come down but WPI inflation has surely come down and it has come down sharply. More importantly, the fall in WPI inflation has almost synced with the repo rate spike. Between May 2022 and October 2022, the repo rates have spiked by 1090 bps from 4% to 5.90%. in this same period, the WPI inflation has tapered from 16.63% to 10.70%; a sharp fall of 593 bps. Clearly, rate hikes first impact the WPI inflation and then the trickle down effect is felt on the CPI inflation with a lag.
Here is what is the story of WPI inflation for the month of September 2022 and how the trend of WPI inflation has panned out.

a)    Between February 2022 and May 2022 the wholesale price inflation (WPI) inflation surged 320 bps from 13.43% to 16.63%. Since the repo rate hikes began in May 2022, WPI inflation has fallen sharply from 16.63% to 10.70%.

b)    Of course, it is rather worrying that the WPI inflation has been in double digits for 18 months in succession. That does not take away from WPI inflation RBI repo rate action have exhibited negative correlation.

c)    What were the triggers for the fall in WPI inflation in September 2022? Manufacturing inflation tapered from 8.24% in July 2022 to 7.51% in August 2022 and further to 6.34% in September 2022. Now, it must be noted that manufacturing has a weightage of 64.23% in the overall WPI basket and hence exerts the highest impact. 

d)    The good news is that even food inflation and energy inflation have been tapering amidst falling global commodity prices. One cannot rule out a spike in the energy inflation for 2 reasons. Firstly, the OPEC has cut supply by 2 million barrels per day (bpd). Secondly, coal and gas prices are headed higher and could make electricity costlier. 

e)    There are still pressure points for WPI inflation like crude and natural gas at 44.72%, Potatoes 49.79%, vegetables 39.66% and wheat at 16.09%. But, this is offset by items in the basket with negative WPI inflation like onions -20.96%, Oil seeds -16.55%, vegetable oil -7.32% and pulses at -0.28%. that helped keep WPI inflation in check.

What triggered the fall in WPI inflation

Between July 2022 and September 2022, fuel inflation fell from 44.62% to 32.61% in line with the global fall in commodity prices. Firstly, recession fears have kept crude prices in check as nothing destroys crude prices as much as demand destruction. We have seen that in the past. However, in India, the government has asked OMCs to hold retail prices of petrol and diesel (these are political issues). Can such largesse be sustained since the government has to shell out a whopping Rs22,000 crore to compensate OMCs?

Commodity Set


Sep-22 WPI

Aug-22 WPI

Jul-22 WPI

Primary Articles





Fuel & Power





Manufactured Products





WPI Inflation





Food Basket





Let us look at some broad takeaways on the WPI front. Manufacturing inflation has fallen from 11.39% in April 2022 to 8.24% in July 2022 and further to 6.34% in September 2022. Global tapering of commodity prices and a COVID driven slowdown in China are helping. Of course, the only risk here is that the low inflation is not an outcome of weak demand and falling income levels or a general pessimism. That is a case where the solution could be worse than the problem itself. 

Should the RBI cheer the fall in WPI inflation?

May be and maybe not. RBI has been disappointed by sticky nature of CPI inflation, but the sharp fall in WPI inflation, gives hope that the CPI inflation cold follow lower in future. In a sense, the RBI will continue to find itself on the horns of a dilemma. The dilemma is whether it should go the hawkish way like the US central bank or stick to growth revival like the People’s Bank of China. The truth probably lies somewhere in between. For now, the WPI data gives the comfort that the CPI data is not giving. It also gives some more purchase and some observation time to the RBI. However, the real challenge would be to ensure that growth does not go for a toss.

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