Wholesale price index inflation is not a very relevant indicator for the monetary policy committee when it deliberates on policy, as it has been mandated to target consumer price index (CPI) inflation. Yet, it is a very good indicator of what is happening on the producer side, as it is broadly speaking, a producers’ price index. This index is dominated by manufactured products, which have a weight of 64 per cent in the index and is also influenced by global factors. Hence the tendency of global prices increasing gets reflected more in the WPI than in the CPI. This number has been above 10 per cent throughout the year and only part of the explanation is in the low-base effect.
The continuous increase in the WPI by double digits also signifies that manufacturers have regained their pricing power, which was lost during the pandemic. But the mirror image is also that input costs have gone up, which means that the same products as raw materials add to cost, which has been passed on to the consumer. Therefore, it is not surprising that it has turned out to be a boom for all commodity-based industries. The global economic recovery has been sharp, which also means that the demand for metals, oils, crude and fertilisers has gone up. This has led to a sharp increase in prices and countered the fall witnessed in the pandemic.
Contrary to our expectations of 11.6 per cent WPI in January at the Bank of Baroda, it has come in at 13 per cent, which is only slightly lower than last month. WPI inflation eased from 13.6 per cent in December ’21 to 13 per cent in January ’22, implying input price pressures continue to remain elevated. Only manufactured products inflation declined from 10.6 per cent in December ’21 to 9.4 per cent in January ’22. Fuel and power inflation remained unchanged at 32.3 per cent. On the other hand, food inflation rose, going from 9.2 per cent to 9.6 per cent. But as can be seen, all the three sub-indices have witnessed upward pressure and remain elevated.
Food inflation in January ’22 is now at a 24- month high of 9.6 per cent. This is contrary to what we see in the CPI, where the level of inflation has been lower. Typically, when an inflationary scenario develops, there is a tendency for wholesale prices to rise faster than the retail prices, as the value chain between wholesale and retail ends tends to cut their margins to control the price rise.
Higher food inflation was driven by a sharp jump in prices of vegetables (38.5 per cent in January ’22 versus 31.6 per cent in December ’21) and eggs, meat and fish (9.8 per cent versus 6.7 per cent). Among vegetables, the prices of onion, tapioca, peas, cauliflower, brinjal, cabbage, carrot, bitter gourd and pumpkin picked up the most. Potato prices fell less sharply. On the other hand, tomato prices moderated significantly. Fruit prices also eased, to 12.5 per cent in January ’22 from 15.1 per cent in the previous month. It should be noted here that typically, inflation in food products, especially horticulture products tends to be moderate in the winter months, which was not the case this year. With the season coming to an end, there will be a tendency for prices to rise as the summer sets in. Therefore this could be one pressure point going forward.
Fuel and power inflation in January ’22 remained unchanged from last month at 32.3 per cent. Coal prices were stable at 3.1 per cent for the third consecutive month in January. Moderation in mineral oil index (52.2 per cent in January ’22 from 62.6 per cent in December ’21) was countered by an increase in electricity prices (15.7 per cent versus -0.2 per cent). The ease in the mineral oil index was despite a pick-up in international oil prices (54.7 per cent in January ’22 versus 49 per cent in December ’21).
With the scaling up of tension on the Russia-Ukraine border, this component becomes more vulnerable, as there is the threat of crude oil prices rising to above $100/ barrel. As there is no subsidy being given on fuel products (except kerosene and LPG to a limited extent), any increase in price will have a negative impact on fuel inflation. The impact on the WPI would be sharper than that on the CPI, as there is higher weightage for this category of products in the index.
Core inflation (inflation excluding food and fuel) in January ’22 slowed for the third consecutive month to 9.7 per cent from 11 per cent in December ’21. Manufactured products inflation was also down to 9.4 per cent in January ’22 from 10.6 per cent in December ’21. Of the 22 commodity indices, 11 indices rose at a slower pace in January ’22 than in December ’21 led by basic metals, textiles, paper products, fabricated metal products and rubber and plastic products. On the other hand, prices of computer and electronic products, electrical equipment, machinery and equipment and motor vehicles accelerated in January ’22. The pace of increase in international commodity prices had softened to 0.8 per cent (MoM) in January ’22, compared to 2.1 per cent increase seen in December ’21, but has again picked up in February ’22 (3 per cent).
It does appear that 2022 too will be a year typified by the phenomenon of rising prices. The IMF had predicted that prices would remain largely stable in 2022 after rising in 2021 due to the post-pandemic recovery in demand. However, the developments in Ukraine have disturbed the equilibrium and this has the potential to distort prices of even metals and food products where Russia has a significant presence. Needless to say, commodity-based industries can look forward to better times.
The writer is Chief Economist, Bank of Baroda. Views are personal
