InvestorQ : Why did the WPI inflation in India go up while the CPI inflation came down?
Aditi Sharma made post

Why did the WPI inflation in India go up while the CPI inflation came down?

Mahima Roy answered.
3 weeks ago

For the month of May 2022, there was an anomalous situation in India. The CPI inflation went down from 7.79% to 7.04% on a sequential basis. At the same time the WPI inflation spiked from 15.08% to 15.88% during the same period. One of the reasons for this divergence is that the CPI inflation depicts the retail consumer inflation while the WPI inflation reflects the producer inflation. Another difference is that CPI gives high weightage to food while WPI gives the highest weightage to manufactured products.

In the last few years, the WPI inflation has assumed a lot more importance considering that the inflation in the post-COVID period has been predominantly driven by supply chain bottlenecks. In other words, the supply of goods has failed to keep pace with the growth in demand. Hence WPI is a very important indicator of manufacturing costs. For May 2022, the 15.88% WPI inflation is all the more disconcerting because the base WPI inflation in May 2021 itself was 13.11%. This was the highest level of WPI inflation in the last 31 years.

What is the reason for this spike in WPI inflation in May 2022? The spike in WPI inflation can be largely explained by factors like the Russia Ukraine war, EU sanctions on Russia, lockdowns in China, money market tightness etc. However, there were some positive tidings in May 2022 in the sense that manufacturing inflation tapered lower from 10.85% to 10.11%. But, that was more than compensated by a sharp spike in food inflation and fuel inflation. Manufacturing inflation has a weightage of 64% while primary articles has 23

The villain of the piece in this case was the Primary Articles inflation which had surged from 15.45% in April 2022 to 19.71% in May 2022. What is primary inflation all about? It essentially comprises of mined minerals, crude oil and agricultural produce. There is one more reason why primary inflation is important. It also has a strong multiplier effect on overall WPI inflation because these costs seep into everything. For example, crude, minerals and agriculture products get into the pricing of everything under the sun.

How is the RBI likely to react to this high WPI inflation or would they still focus only on CPI inflation. The problem is that the rate tightening may address the CPI inflation issue but cannot do much about WPI inflation. That would require more of fiscal measures like duty cuts and quotas. For now, the impact of steep input costs is here to stay.