The single-digit Wholesale Price Index (WPI) expectedly lasted only a month, as June 2024 saw the WPI at 10.6 percent year-on-year – still very low when seen in the context of the last three years. On a sequential basis, the slide seems to have been arrested, and the wholesale prices may already have bottomed out last month as anticipated earlier. While the WPI composition has significantly changed from a year and two ago, as energy prices now constitute the lion’s share in WPI changes, things may well be up for another reset after the budget-related revenue measures come into effect.
Of all the inflation floodgates about to open, none is bigger than the dairy sector’s. With the packaged milk GST okayed, loose milk prices are slated to keep up with the historical differential. Raw milk has the single largest basket weight in WPI at 7 percent which feeds into the agriculture sub-group. Another 4.5 percent is the weight of processed liquid milk in the WPI basket – the highest in the food and beverages category.
The expected increase next month in wholesale milk prices could be anywhere between 10-20 percent – but at either end – it will be the sharpest monthly increase in dairy prices ever recorded in WPI. For CPI baskets, milk has the highest basket weights at 10 and 7 percent for rural and urban settings respectively, and the transmission from wholesale to retail will be a rather straightforward affair.
The international food price index tracked by the UnitedNations FAO has been gradually picking up – having registered three straight months of uptick. Some imported grain prices may well be under pressure in the months to come if the trend in cereal and dairy indices continues for a little longer. For now, early reports for domestic crops are encouraging and should largely keep prices in check. The vegetable oil index has also largely behaved for well over a year and the market seems amply supplied for any price shock to set in anytime soon.
What happens with the industrial electricity tariffs in the base tariff revision exercise will determine if the weighted average contribution from the electricity and gas sub-group continues to lead WPI or takes a backseat. News reports suggest the government is contemplating slashing industrial electricity tariffs considerably, although the IMF is yet to be onboarded. If the plan goes through, expect a sizeable reduction in WPI going forward. On the other hand, tariffs for residential consumption are almost certainly slated to go up – and the CPI and WPI gap may once again widen in FY25. Ogra has notified increased prices for captive industrial gas users, but the same may not be reflected in WPI changes, as the methodology is restricted to changes only in general industrial tariffs.
With the recent uptick in international energy commodity prices and the government’s lofty Petroleum Levy targets for FY25 – expect petroleum prices to stay on the higher side in the near future, and that could possibly lead to second and third rounds of retail price transmission with varying degrees of lag. From what it appears, the WPI may well have bottomed out for now, barring a big surprise in industrial electricity tariffs – and that generally means the CPI is still a long way away from single-digit entry.
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