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WPI inflation increases to series high of 7.4%

* WPI inflation increases to series-high of 7.4% in Mar 2021: Wholesale inflation increased to series-high of 7.4% in Mar 2021 (I-Sec estimate: 6.5%, consensus: 6.2%). This is a sharp jump from 4.2% in Feb 2021 and 0.4% in March 2020. With this print, average wholesale inflation in FY21 stands at 1.2%. WPI food inflation came in at 5.3% in Mar 2021 from 3.3% in Feb and 5.2% in Mar 2020. Out of this, the contribution by ‘primary articles food’ was ~203bps and ‘manufactured food’ was ~330bps.

* Base effect and sequential momentum contribute equally to WPI: Although the Mar 2021 print came on a low base, the sequential increase in wholesale inflation was driven equally by base effect and month-on-month momentum. Out of the 320bps increase in WPI during Mar and Feb 2021, base effect contributed ~150bps and month-on-month momentum contributed ~160bps.

* Manufacturing inflation continues to drive WPI inflation; fuel costs also surge in March: While all components of the WPI basket recorded rising prices in Mar 2021, manufacturing prices continued to be the largest driver of inflation. Manufacturing inflation surged to 7.3% in Mar 2021 from just 0.3% twelve months ago. Moreover, ‘fuel and power’ inflation also increased sharply to 10.3% in Mar 2021 from -2.9% a year ago. Out of the 700bps increase in WPI during Mar 2021 and Mar 2020, manufacturing contributed ~450bps, ‘fuel & power’ contributed ~160bps while ‘primary articles’ contributed ~90bps.

* Base metals account for ~45% of manufacturing inflation: Metal prices, which started rising sharply from Nov-Dec 2020, continued recording high inflation in Mar 2021. Basic metals recorded an inflation of 16.6% in March, the fourth consecutive double-digit inflation. Large stimulus in several countries and robust recovery in China and the US has led to strong demand for metals. We expect metal prices to remain elevated in the near term on the back of strong stimulus in the US in the recent past and expected faster recovery in global growth. Between Mar 2021 and Mar 2020, manufacturing inflation increased by ~730bps out of which basic metals accounted for ~320bps followed by chemicals (120bps), and textiles (80bps).

* Higher mineral oil prices push fuel inflation to 28-month high: Fuel & power inflation surged to 28-month high of 10.3% in Mar 2021 up from just 0.6% in Feb 2021 and -2.9% twelve months ago. While coal and electricity inflation fell during Mar 2021, mineral oil prices increased sharply to 10.9% from -5.3% in Mar 2020. Mineral oil prices are likely to remain elevated in the next few months, partly due to low base effect, keeping overall ‘fuel & power’ inflation high.

* Primary articles inflation rises to 13-month high: In line with other components of WPI, primary articles inflation also increased to 13-month high of 6.4% in Mar 2021 from 1.8% in Feb and 2.2% in Mar 2020. Unfavourable base effect is likely to keep primary articles inflation high in the near term. Within primary articles, ‘crude oil & natural gas’ component was the largest contributor to rising inflation.

* WPI exceeds CPI for the first time in 23 months: An interesting takeaway from this month’s WPI print was that wholesale inflation was higher than retail inflation for the first time since Apr 2019 and the gap was the widest since Nov 2018. At 7.4%, WPI for Mar 2021 exceeded CPI (5.5%) by 1.9%. Although the baskets for WPI and CPI are quite different, rising wholesale prices of overlapping items (such as certain food items) do not bode well for retail inflation going forward.

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