WPI bottoming out?

The Wholesale Price Index (WPI) at 9.9 percent for May 2024 is the first single digit reading in 40 months. The WPI and CPI gap has considerably narrowed and the transmission to retail has become quicker in the last six months – especially after the gas price revision took effect, as administered energy prices took charge of the WPIcontribution from food, and transportable goods. The 2.55 percent month-on-month decline is the steepest fall since the WPI was rebased on 2015-16 base.

The case of food sector is one of the most seamless transmission from wholesale to retail. The month-on-month change in urban and rural food CPI has averaged 0.1 and 0.16 percent, respectively in 11MFY24. The WPI food component in the same period has inched up at an average of 0.19. The FY22 and FY23 WPI and CPI food sector month-on-month changes are also pretty close between 2-2.5 percent, with a negligible lag in terms of transmission to retail.

The WPI agriculture sector is also rather straightforward, with the likes of rice, poultry, and fiber crops (one-third of WPI agriculture basket) feeding directly into retail prices without a lag. Wheat, wheat flour, and vegetables registered the largest ever month-on-month decline in May 2024, whereas poultry was not far behind at a 36-month steepest fall in wholesale rates.

Ever since the trend reversal in petroleum prices, transportable goods’ contribution to WPI has gone considerably down, which also explains the faster transmission to retail prices as second round effects are usually associated with transportable goods and metal categories.

With the historic wheat price decline already done, poultry prices corrected, vegetable seasonality to kick in, and base effect from last year, this could well be the bottom for WPI for the near future. Overall good crops should still keep prices in check even as the international food price index seems to have bottomed out and is rising slowly.

Energy transmission has been smooth so far, but more taxes in the budget could well lead to revised wholesale rates in some sectors. Energy remains the key, but WPI’s property of being a leading indicator shrinks when it is dominated overwhelmingly by gas and energy prices – especially when most exemptions have been withdrawn and is likely to be the case going forward. Upward adjustments may be lesser than earlier anticipated and there may be room for a price cut for general industries as average gas prices are slated to come down.