InvestorQ : Do you see this is as a good sign for India that both CPI inflation and WPI inflation are lower in June 2022?
Aditi Sharma made post

Do you see this is as a good sign for India that both CPI inflation and WPI inflation are lower in June 2022?

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Mahima Roy answered.
1 month ago
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During the week, the consumer inflation (CPI) and the producer inflation (WPI) were announced. CPI inflation came in marginally lower at 7.01% while WPI inflation for June 2022 came in 70 bps lower at 15.18% compared to 15.88% in May 2022. However, it must be remembered, before celebrating, that this 15.18% WPI inflation in June 2022 is on a relatively high base of 12.07% in June 2021. Above all, the April WPI inflation was upped by 30 bps and it is very likely that May and June may also see upping of the WPI number.

Commodity Set

Weight

Jun-22 WPI

May-22 WPI

Apr-22 WPI

Primary Articles

0.2262

19.22%

19.71%

15.18%

Fuel & Power

0.1315

40.38%

40.62%

38.84%

Manufactured Products

0.6423

9.19%

10.11%

11.39%

WPI Inflation

1.0000

15.18%

15.88%

15.38%

Food Basket

0.2438

12.41%

10.89%

9.13%

The above table captures the break-up of WPI inflation for the last 3 months. The one thing you would notice different about WPI inflation is the predominance of manufacturing, which is nearly 64.23% of the WPI basket. This is in contrast to the CPI basket, which is dominated by food prices. WPI, therefore, becomes a superior measure of producer costs and supply side driven inflation, which is what is happening in the current scenario. Clearly, it is food and fuel that are putting all the pressure on WPI inflation this month.

There are some key numbers to remember here. WPI inflation did taper from 15.88% to 15.18% in June but it is above 15% for third month in a row. WPI is in double digits for the 15th month in a row. However, the weighty manufacturing inflation has tapered from 11.39% in April 2022 to 9.19% in June 2022. Some of the key drivers of higher WPI inflation in June 2022 were crude petroleum at 77.29%, vegetables at 56.75%, LPG at 53.20% and potatoes at 39.38%. Headwinds indicate that there is a possibility of WPI inflation rising.

In June 2022, there is some good news from the high frequency MOM WPI inflation. Overall MOM WPI inflation for June 2022 was flat at 0.00% against 2.48% in March 2022. Manufacturing inflation dipped from 2.45% in March 2022 to -0.76% in June 2022; on a MOM basis. Even fuel and power on MOM basis was sharply down in this period from 5.07% to 0.65%. So, the short term momentum appears to favour lower WPI inflation. But what does all this mean for the RBI stance on interest rates, especially in August policy.

Despite RBI showing aggressive hawkishness by hiking repo rates and CRR; the CPI inflation may have come down sharply, but WPI inflation is yet to come down meaningfully. That is more due to the fact that WPI inflation is imported inflation and needs international prices to taper for smoother supply chains. WPI inflation may also be indicating that monetary measures may have played the part and now it is up to fiscal measures. But that is where the dilemma starts as it would have a direct impact on government revenues.

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