WPI nearing peak?

While nobody may be noticing but the Wholesale Price Inflation (WPI) has notched another month of 24 percent year-on-year increase in March 2022. It has now been seven straight months of WPI recording in excess of 20 percent, with 9MFY22 growth at 22 percent. This is in sharp contrast to the WPI in the same period of FY21, which averaged a little over 6 percent.

Just two months after the WPI first hit double digit in February 2021, the retail price index entered double digit, and has largely stayed in double digit for most of FY22 thus far. The lag effect of WPI on retail prices is well-documented. The last Bull Run for WPI lasted for over a year and a half and it took a global pandemic for brakes to be applied. It was towards the end of the bull rally, that the CPI peaked at 14 percent.

A considerable difference between the two WPI rallies is the composition, as the current wave is more broad-based and revolved around stickier prices. Back then, it was largely built around significant revision in electricity and gas prices, where most other categories showed single-digit growth. This time around, the increase stems from many roots. Agriculture, food, metal, textile, and transportable goods – have all shown considerable degree of increase.

The transportable goods continue to lead the way with 36 percent average increase in 9MFY22, as global oil prices have wreaked havoc. This is despite the government letting go of all petroleum revenues and effectively subsidizing petroleum products. The PM relief package ensures the prices don’t go bonkers, but they also ensure that in case of any respite in global crude oil prices, whoever is at the helm of affairs in Islamabad, would want to grab the opportunity to earn some tax revenue.

On electricity front, the relief package does not extent to industrial users, and for the next four months – the electricity WPI and CPI may show contrasting trends. The electricity price change for March 2022 for CPI purposes is estimated to have gone down by 13 percent. This is despite the highest-ever monthly FCA of Rs5.9/unit for March. The Rs5/unit relief has offered a breather to retail and commercial consumers, but big players do not have that luxury, and will continue to pass on the increased electricity cost to retail.

That said the high base is just a month away before it hits, and that alongside reduced power and static petroleum prices could offer a breather. The deteriorating currency will invariably have its say in prices at some point. With how things are panning out on the political front, any tough price measures for the next three to four months are less likely, especially on the energy front. The WPI rate of increase may well slow down, even if it does not translate that swiftly to retail prices.