WPI Economics Research

DATA RELEASE
No input cost pressures yet
14 AUGUST 2020
July Headline WPI inflation remained in the deflation zone for the fourth
consecutive month even as the pace of decline moderated to 0.6%YoY after
declining by 1.8%YoY in June. This was due to smaller contraction in fuel and
core inflation while food inflation increased. Turn in the WPI inflation failed to
match the strong rise in CPI inflation for July as the latter was impacted by
supply-side disruptions on food and higher taxes on fuel. The elevated Headline
CPI inflation will keep RBI on the side-lines for now. While softer CPI inflation
may lead RBI to again cut repo rate in December/February; the space for
incremental cuts have surely moderated.

Consolidated WPI food inflation rises to 4.3%YoY in July v/s 3.1%YoY in June:
This was led by higher primary food inflation that rose to 4.1%YoY in July v/s 2.0%YoY
in June while manufactured food inflation moderated to 4.9% in July from 5.0%YoY in
June. Item-wise detail reveals that the rise was led by higher inflation in vegetables
(8.2%YoY), ‘eggs, meat and fish’ (5.3%YoY) and milk (4.6%YoY). Meanwhile, inflation
Highlights moderated in cereals (0.2%YoY) and fruits (-3.0%YoY).

• Headline WPI remains in a Consolidated fuel inflation sees a more moderate decline: Consolidated fuel prices
disinflationary zone at -0.6% YoY (crude oil and fuel and power) contracted by 11.5%YoY in July after declining by
in July but with a rise in food 16.3%YoY in June. Item-wise detail reveals lesser decline in crude petroleum by
inflation 25.6%YoY in July v/s 41.5%YoY decline in June, reflecting some stabilization in global
crude prices as countries ease lockdown restrictions globally and OPEC+ countries cut
• Core WPI inflation remains in supplies. Mineral fuel product prices also saw a lesser decline led by some recovery in
the deflation zone for 12th month, kerosene prices (-31.7%YoY in July v/s -62.1% in June), Naphtha, ATF, petrol and
indicating weak input price diesel prices.
pressures
Core inflation remains in deflation zone for the 12 th month: Core inflation (non-food
• Retail inflation trends denoted manufacturing) remains weak at -0.3%YoY in July v/s -0.8%YoY in June. Downward
that space to cut rates may open- pressure on core inflation was led by textiles (-4.8%YoY in July v/s -3.8% in June), basic
up only in December / February metals (-2.6%YoY in July v/s -4.4% in June) and chemicals (-2.1%YoY in July v/s -2.7%
in June). Basic metal prices are a function of global growth conditions and have been
contracting since May 2019, maintaining downward pressure on core. If we exclude
basic metals from core inflation, it turns positive at 0.1%YoY after a gap of four months.
Looking ahead, we expect core inflation to gradually recover as global prices of
commodities rise with some normalisation of growth. However, the pace will be very
gradual as production capacities are likely to remain below pre -Covid19 levels.
Restrictions on movement and social distancing norms are likely to remain in place as
new cases continue to rise globally, limiting capacity utilization levels for producers.

Supply side disruptions impacting retail inflation more than wholesale: The
consistent weakness in WPI inflation shows that the risk of upward pressure from
wholesale prices to retail prices remains low. Sharp contraction in global growth will
keep crude oil and commodity prices in check. Moreover, as mentioned above,
production capacities are not expected to return to pre-Covid19 levels due to restrictions
on movement and maintaining social distance. On the food front, strong kharif sowing,
expectations of normal monsoon, more than adequate government buffer stocks and
lower global food prices, should keep food inflation in check in the coming months. We
expect full year FY21 WPI inflation to average at -1.1%, remaining in deflation zone for
Gaura Sen Gupta majority of the year.
gaura.sengupta@idfcfirstbank.com
+91-22-7132 5562 There has been a divergent trend between WPI inflation and CPI inflation since mid-
2019, with a steady rise in CPI inflation. This divergence is a reflection of the higher
Indranil Pan weight of fuel and commodities and relatively lower weight of food in WPI. Post the
indranil.pan@idfcfirstbank.com
+91-22-7132 5631
Covid-19 shock the divergence between to the two series has become even more
pronounced with a relatively faster rise in retail food prices due to the supply-side
disruptions caused by the lockdown and rise in domestic taxes on fuel products
neutralising the decline in global crude oil prices. With CPI inflation higher than 6% mark
for almost 3 quarters, the RBI opted for a pause at its August monetary policy meeting,
thereby re-establishing its primary mandate of an inflation targeting central bank. While
the inflation story is extremely dynamic, our current assessment point towards Headline
CPI average moderating to 3.8-3.9% by Q4FY21. This implies that room for further cuts
can only open in December/ February and will be limited to 25bps (mostly likely case)
to 50bps (most bullish case).

For Private Circulation only. “Important disclosures appear at the back of this report”
 WPI

Exhibit 1: WPI contracts by 0.6% in July Exhibit 2: Divergent trend between CPI and WPI since mid -2019
30.0%
Headline Consolidated Food Core Fuel 10.0% CPI inflation WPI inflation

20.0% 8.0%

6.0%
10.0%
4.0%
0.0%
2.0%
-10.0%
0.0%

-20.0% -2.0%
WPI inflation YoY%

-30.0% -4.0%

Nov-18

Nov-19
Sep-18

Sep-19
Mar-18

Mar-19

Mar-20

May-20

Jul-20
May-18

Jul-18

May-19

Jul-19
Jan-19

Jan-20
Sep-18

Sep-19
Nov-18

Nov-19
Mar-19

Mar-20
Jul-18

Jul-19

Jul-20
May-18

May-19

May-20
Jan-19

Jan-20
Source: CEIC, IDFC FIRST Bank Economics Research Source: CEIC, IDFC FIRST Bank Economics Research

Exhibit 3: Supply side disruptions more at a retail food price level Exhibit 4: Higher taxes absorbing all the decline in global fuel prices
16.0% CPI food inflation WPI Consolidated food inflation 30.0% CPI fuel WPI fuel
14.0%
20.0%
12.0%
10.0%
10.0%
8.0%
6.0% 0.0%
4.0%
-10.0%
2.0%
0.0%
-20.0%
-2.0%
-4.0% -30.0%
Sep-18

Sep-19
Nov-18

Nov-19
Mar-18

Mar-19

Mar-20
Jul-18

Nov-19
Jul-19

Jul-20

Sep-18

Nov-18

Sep-19
May-18

May-19

May-20

Mar-18

Mar-19

Mar-20
Jul-18

Jul-19

Jul-20
Jan-19

Jan-20

May-18

May-19

May-20
Jan-19

Jan-20
Source: CEIC, IDFC FIRST Bank Economics Research Source: CEIC, IDFC FIRST Bank Economics Research

Exhibit 5: WPI detail break-dow n

YoY% Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20
WPI inflation 2.8% 3.5% 2.3% 0.4% -1.6% -3.4% -1.8% -0.6%
Consolidated food 11.2% 10.1% 7.2% 5.2% 4.4% 2.7% 3.1% 4.3%
Consolidated fuel 1.1% 5.1% 1.6% -6.2% -17.4% -25.1% -16.3% -11.5%
Manufacturing -0.3% 0.6% 0.5% 0.3% 0.2% -0.3% 0.1% 0.5%
Core (non-food manufacturing) -1.6% -0.7% -0.6% -0.8% -0.8% -1.3% -0.8% -0.3%
Source: CEIC, IDFC FIRST Bank Economics Research.

2 | IDFC FIRST BANK ECONOMICS RESEARCH 14 August 2020

 WPI

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3 | IDFC FIRST BANK ECONOMICS RESEARCH 14 August 2020