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Low base, rising metals prices push WPI to 13% in May ‘21

* Wholesale inflation in double-digits for the second consecutive month:

WPI inflation came in at 12.9% y/y in May 2021, up from 10.5% in Apr 2021 and -3.4% in May 2020. This is the second consecutive double-digit print of wholesale inflation and also a series high. With this print, average WPI inflation in the first two months of the fiscal stands at 11.7% compared to -2.5% in Apr-May 2020.

* Low base accounts for ~65% of the increase; monthly momentum accounts for 35%:

Since WPI twelve months ago was a deep negative of -3.4%, a large part of the sequential increase between May 2021 and Apr 2021 is driven by bas effect. Our analysis shows that out of the total increased of 240bps between May 2021 and Apr 2021, base effect contributed ~65% while month-on-month momentum contributed the remaining 35%. The base for WPI is low for the next 2-3 months. Hence, we expect the pure statistical effects to keep WPI high by itself.

* Manufacturing inflation continues driving WPI higher:

All the three components of WPI viz. primary articles, fuel and manufacturing recorded surging inflation. While fuel inflation surged to 38%, manufacturing and primary articles inflation came in at 10.8% and 9.6% respectively. However, given the weight in WPI basket, manufacturing component was the largest contributor to wholesale inflation.

* Within manufacturing, base metals accounts for over one-third of total inflation:

In line with the trend noticed in the past few months, base metal prices continued to increase rapidly, pushing up overall manufacturing inflation. In May 2021, base metals accounted for ~37% of total manufacturing inflation (compared to their weight of 15%) while manufactured food accounted for 20% (compared to 14% weight). Hence, both these items punched above their weight and together drove the increase in wholesale inflation. Other large contributors were chemicals (10%), textiles (8%), and fabricated metals (5%).

* Fuel inflation surges to 38% in May 2021:

Fuel inflation surged to series-high of 37.6% in May 2021, mainly on the back of a sharp increase in mineral oil prices. Mineral oils, which account for 60% of fuel basket, recorded a price increase of 81% in May 2021. Inflation in coal and electricity was relatively smaller at 0.7% and 5.8% respectively. Average fuel inflation in the first two months of FY22 is now at 30%.

* Higher crude oil prices drive primary articles inflation up:

Mirroring the rising oil prices, primary articles inflation also inched up to 9.6% in May 2021 from -2.1% in May 2020. Although ‘crude petroleum and natural gas’ component has a relatively small weightage of 11% in the primary articles basket, the 56% y/y inflation recorded by the components in May 2021 led to it being the largest contributor to fuel inflation basket.

* Higher WPI likely to exert pressure on CPI:

Persistently high WPI is likely to exert pressure on retail inflation in the coming months. Although WPI exceeded CPI by 660bps in May 2021, we expect the wedge to narrow in the coming months as CPI starts increasing.

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