Macroscope – WPI Inflation (March 2021)

What Is The Latest Reading?

India’s latest wholesale inflation recorded 7.39%, thereby increasing to its highest figures in eight years. This comes on the back of the prior month recording a 27-month high, at 4.17%. WPI inflation has increased for third consecutive month.

WPI maintained its record of positive figures, signaling producers regaining pricing powers. The rise in WPI is mainly due to price increases of commodities in crude oil, petroleum products and basic metal. Wholesale food index has seen significant spike in 2021, jumping from -0.26% and 3.31% in Jan And Feb’21 to 5.28% in Mar’21.

Element Inflations

Analyst Commentary

Low base effect and expected pick-up in food prices (after remaining soft for months) will be key sub-elements to observe in future readings for the wholesale price index. Rising commodity prices, and pass-through pricing power courtesy of demand normalization pose as upside risks to inflation readings in near-term.

In the manufacturing vertical (index weight = 64.23%), 16/22 elements witnessed price rises due to higher input costs. Key input material in Crude oil (WTI) surged on the back of expected quicker activity recoveries due to COVID-19 vaccinations. Declining crude oil inventories in U.S., tighter supplies from OPEC, and rising govt. taxes, further supported oil prices to reach its pre-pandemic level, adding to inflation level.

Metal prices, which started rising sharply from Nov-Dec 2020, recorded high inflations in Mar 2021 as well at 16.6%. This marks the fourth consecutive double-digit inflation increase in this sub-sector, which accounts for ~45% of manufacturing inflation. Large stimulus in several countries and robust recovery in China and the US can maintain strong demand trend for metals in times to come.

As pressures on perishable food prices ready for a go on the downside, other factors such as supply-side disruptions, and higher labor charges can dampen hopes of drop in inflation in coming times. The expectations of a stable monsoon can alleviate pressures to certain extent.

An interesting takeaway from this month’s WPI print was WPI inflation recording higher figures than CPI inflation. It overlapped the latter for the first time since April 2019, with gap (1.9%) as wide last seen in November 2018. Even though WPI and CPI comprise of different constituents, the rising wholesale prices of overlapping items (such as certain food items) indicates tougher times for its consumer counterpart in times to come.

Post-covid clarity and supportive govt. policies will be instrumental in charting demand-&-supply discipline, thus assigning sensibilities in printing WPI expectations in the near-term. RBI can act as catalyst for the same by resorting to out-of-the-norm practices to ensure successful transmission of rate cuts, thus meriting organization in charting interest (borrowing/lending) rates.

Click here to read Office Of Economic Advisor’s original press release on “Index Numbers of Wholesale Price in India for the month of March, 2021”