Drop in wholesale food inflation to 6.7%YoY provides relief - WPI June 2021

Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research shares views on the WPI June 2021

"After rising for 5 successive months since Jan-21, WPI inflation for Jun-21 has witnessed a slight decline to 12.07% as compared to 12.94% in May-21 on a YoY basis. However, the index continues to rise on a sequential basis at 0.8% in Jun-21 vis-à-vis 0.5% in the previous month, reflecting the impact of high commodity and retail fuel prices and its pass through to the prices of manufactured products. The inflation in manufacturing sector inflation continues to be high at 10.9%YoY although it has decreased moderately on a sequential basis from 0.8% to 0.4% in Jun-21. The persisting cost pressures in manufacturing is also reinforced by the fuel and power inflation which stood at 32.8%YoY and has also climbed sequentially by 2.9% as against 1.5%MoM in May-21. This is driven by the sharp rise of 9.5%MoM in diesel prices and would have been higher without the 7.7%MoM drop in LPG prices. What provides some relief is the drop in wholesale food inflation to 6.7%YoY from 8.1%YoY in the previous month and with hardly any sequential rise over the last 2 months. The prices of basic metals also continue to rise as indicated by the 1.5%MoM and the 28.9%YoY print.

Clearly, the steady pass through of increased costs in manufactured products has spill over risks to CPI inflation in the near term. However, a benign food inflation print and a moderate growth in overall demand may help to keep the inflation risks under control over the next 2 quarters.

"On expected lines, WPI inflation for May 2021 has increased to 12.94% further from 10.49% on a YoY basis. This is the twelfth consecutive month since June 2020 that the WPI has continued to rise on a sequential basis, reflecting the steady rise in commodity prices and particularly retail fuel prices over the last few months. The fuel and power component has climbed sharply by 37.6% in May on the back of the 20.9% annualised growth in the previous month which can be partly attributed to the base factor and partly to the increase in retail prices in May. However, the current driver of WPI inflation is the continuous rise in the prices of manufactured products on a sequential basis and averaging 1.2% since the last 6 months. On an annualised basis, the inflation in manufactured products has averaged 7.2%, standing at 10.8% in May 2021. The annualised inflation particularly for basic metals and mild steel prices stood between 28%-24% and is a cause for concern. Clearly, the steady pass through of increased costs in manufactured products has spill over risks to CPI inflation particularly due to lockdown driven potential supply constraints in the near term. However, a benign food inflation print and an expected moderation in overall demand may constrain any significant increase in average CPI for FY22.

Source : Equity Bulls

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