The Wholesale Price Index (WPI) at 13.9 percent for April 2024 was at a 39-month low. It should spell good news for retail prices in most circumstances, as more often than not, WPI serves as a leading indicator for CPI prices. On month-on-month basis, WPI is negative 0.7 percent for April 2024 – which is only the third such instance in the ten months of FY24.
The WPI composition in April 2024 is significantly altered from a year ago and the start of FY24 – as gas and electricity prices have the lion’s share in terms of weighted average contribution. At the start of FY24, WPI was spearheaded by food and agriculture products with a 66 percent weighted contribution on a basket weight of 46 percent. The contribution in April 2024 is down to as low as 28 percent – easily the lowest since at least FY15. Food products and beverages sub-group ’s 8 percent weighted contribution is the lowest since FY15 and the only single-digit entry.
On the other hand, electricity, and gas sub-group with a WPI basket weight of 12 percent recorded the highest weighted contribution reading of 45 percent, save the Covid quarter of 2020. It has now been six straight months that electricity and gas have had the highest weighted contribution to WPI.
Mind you, this is despite the PBS’ methodology leading to significant underreporting of gas price change for the industrial sector. Recall that gas prices for various industrial consumers went up with effect from February 1, 2024 – especially for captive and fertilizer consumers. But the WPI takes into account only the general industrial tariff, hence there is no increase recorded under the head since February 2024. This obviously does not mean that the price change did not happen, or it will not translate into higher output prices for retail. Only that much of the transmission will happen without the WPI necessarily showing the same.
Another nugget that stands out in the WPI data is the cotton yarn price movement. Cotton yarn with 5.2 percent basket weight constitutes more than half the textile and apparel WPI basket. The WPI methodology detail lists five items of different cotton yarn varieties, to be collected from different spinners, with specific details provided. Now consider this. For 19 straight months, cotton yarn wholesale prices have not moved an inch.
All this while, various cotton indices have moved in all directions. This is not to say if the end result here is an underreporting or otherwise, but is surely incorrect, as cotton yarn prices staying unchanged for 19 months on the trot, is unthinkable. For context, in the same period, cotton cloth prices in the CPI basket have gone up nearly 40 percent.
Be that as it may, with energy prices taking over the WPI driver’s seat, the transmission to retail will be markedly different from previous instances of food heavy WPI contribution. It will be critical to keep an eye on core inflation, which has been rather sticky, even as overall inflation has come down faster. NFNE core inflation has averaged 1 percent month-on-month for the past three months, as against 0.3 percent for national CPI.
The ongoing quarter has offered some respite in electricity tariffs but will most likely change for the worse come July 2024 as new base effect comes into play. Gas price rationalization too, is always around the corner, especially with the IMF on board, with stricter prior conditions expected. While the peak is well past us, events in the coming two to three months may well keep the pressure up.