WPI inflation for May 2022 at 31-year high of 15.88%

WPI inflation hits new high

by 5paisa Research Team Last Updated: 2022-06-15T16:23:36+05:30

In the realm of inflation, the most common benchmark is the consumer inflation or the CPI inflation as it is known in India. However, there is another measure of inflation which looks at prices from the producer perspective.

WPI inflation is such a measure. In the last few years, it has assumed a lot more importance since the inflation in the post-COVID period has been driven by supply chain bottlenecks, wherein the supply of goods has failed to keep pace with the growth in demand. That is the stress that WPI inflation reflects. 

Between February 2022 and April 2022 WPI inflation surged from 13.11% to 15.08%. But that was hardly the peak as May 2022 WPI inflation has now come in 15.88%. Let us understand why this is worrisome. Firstly, the base of May 2021 itself had WPI inflation of 13.11%, so on that base, this is quite a lot of pricing pressure.

Secondly, this is highest inflation seen in 31 years and the last time WPI was at these levels was during the last days of the Chandrasekhar government way back in 1991. That period is well documented. 
 

Now for the May 2022 WPI inflation story


In May 2022, CPI inflation has come down but WPI inflation has gone up. This divergence is due to the difference in weightages. WPI inflation gives the highest weightage to the food basket while WPI inflation assigns the highest weightage of 64.23% to manufactured products.

Hence, WPI inflation is a better barometer of producer costs. It also acts as a lead indicator of margin pressures. Have we not seen that in adequate measure in Q3 and Q4?

Why did May 2022 WPI inflation come so high at 15.88%. The spike in WPI inflation was catalysed by factors like the Russia Ukraine war, EU sanctions on Russia, anti-COVID lockdowns in China, money market tightness etc.

The good news in May 2022 is that manufacturing inflation tapered lower from 10.85% to 10.11%. However, that was more than offset by the sharp spike in food inflation and fuel inflation. 

 

Commodity Set

Weight

May-22 WPI

Apr-22 WPI

Mar-22 WPI

Primary Articles

0.2262

19.71%

15.45%

15.94%

Fuel & Power

0.1315

40.62%

38.66%

31.78%

Manufactured Products

0.6423

10.11%

10.85%

11.26%

WPI Inflation

1.0000

15.88%

15.08%

14.63%

Food Basket

0.2438

10.89%

8.88%

9.29%

Data Source: Office of the Economic Advisor

The table tells an interesting story and that is the story of primary inflation going up sharply. In fact, Primary Articles inflation surged from 15.45% in April 2022 to 19.71% in May 2022. This comprises of mined minerals, crude oil and agricultural produce. In all these cases, it is a classic case of supply chain bottlenecks.

Remember, primary inflation has a strong multiplier effect on overall WPI inflation because these costs seep into everything. Let me for a moment get back to the story of corporate results and operating margin pressures and link WPI inflation to it. There is some good news in that manufacturing inflation in May 2022 fell from 10.85% to 10.11%.

However, unless this is sustains, operating margins may not get much help. Also, the pressures of higher input costs in April and May will be visible in the June quarter corporate results for Q1FY23. Let us sum up the WPI story.

There are some positive tidings if you look at WPI inflation on a month on month basis. For example, pressure on fuel and manufactured products is reducing. But the problem remains the primary articles and their multiplier effect on the final output. As long as the supply chain constraints continue to hit the supply of primary articles the pressure on WPI inflation is likely to continue.
 

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How important is WPI inflation to the RBI game plan?


Will the RBI celebrate that CPI inflation has fallen or would it worry about rising WPI inflation. In reality, it will be a mix of both. In May 2022, consumer inflation fell from 7.79% to 7.04% but WPI inflation increased from 15.08% to 15.88%. RBI monetary measures will address the CPI inflation but may not do much for WPI inflation. The only possibility is that too high rates will kill demand and bring down WPI inflation. But that would be a case of the remedy being worse than the problem. 

In the realm of WPI inflation there are a number of factors that are global in nature and neither the RBI nor the government has too much control. Q4FY22 saw pressure on operating margins and on working capital cycles. Hopefully, Q1FY23 should be better.


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About the Author

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