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WPI inflation at an 11-month low of 12.4% YoY in Aug’22

Lower than our expectation

* Wholesale Price Index (WPI) based inflation came in at a 11-month low of 12.4% YoY in Aug’22 as against 13.9%/11.6% YoY in Jul’22/Aug’21. The number was lower than a Bloomberg survey of 13% YoY and our forecast of 13.4% YoY.

* Internals suggest that 50% (6.2pp) of the headline WPI inflation in Aug’22 were caused by imported inflation – the lowest contribution in 17 months. The lower headline number was largely due to lesser imported inflation (41% weightage in the WPI basket), which touched a 17-months low of 15.9% YoY in Aug’22. Domestic WPI inflation was sticky at 10.2% YoY in Aug’22 v/s 10.1% YoY in Jul’22.

* WPI food inflation stood slightly higher at 9.9% YoY in Aug’22 as against 9.4% YoY in Jul’22, led by higher inflation in primary food articles, while the same in manufactured food items inched lower MoM in Aug’22.

* WPI inflation in ‘primary articles’ came in marginally lower at 14.9% YoY (v/s 15% YoY in Jul’22) in Aug’22, and that in ‘fuel and power’ stood at a five-month low of 33.7% YoY (v/s 43.7% YoY in Jul’22). WPI inflation in ‘manufactured products’ touched an 18-month low of 7.5% YoY in Aug’22 (v/s 8.2% YoY in Jul’22).

* Core WPI (non-food manufactured products) inflation came in at a 16-month low of 7.9% YoY in Aug’22 v/s 8.4% YoY in Jul’22.

* Imported inflation still contributes half of WPI inflation. While WPI inflation inched lower, CPI inflation stood higher in Aug’22, which showcases the strong pricing power of retailers. Overall, we expect CPI (monetary policy anchor) to ease towards 6%/5.5% by 4QFY23/Mar’23. We expect the RBI to hike the repo rate by another 50-60bp by Dec’22, taking the policy rate to 6% by the end of Dec’22.

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