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WPI inflation at 11-year high of 10.5% YoY in Apr’21

…weighed by broad-based rise in inflation and low base effect

* WPI inflation stood at an 11-year high of 10.5% YoY in Apr’21, against 7.4% YoY in Mar’21 and deflation of 1.6% YoY in Apr’20 (Exhibit 1). The number is higher than both our forecast of 8.7% YoY and the Bloomberg consensus of 9.4% YoY.

* While the sharp rise in WPI inflation was broad-based, this was also due to the low base of Apr’20 – when the government had imposed nationwide lockdown, leading to a relatively low response rate in the computation of the WPI index.

* WPI food (both primary articles and manufactured food items), accounting for ~25% weight in the WPI basket, rose to a 15-month high of 7.6% YoY in Apr’21 v/s 5.3% in Mar’21 and 4.4% YoY in Apr’20 (Exhibit 2).

* Primary articles (WPI weight: 22.6%) registered 16-month high inflation of 10.1% YoY in Apr’21, against 6.4% in Mar’21, driven by food and non-food articles, minerals, crude oil, and natural gas. Crude oil and natural gas inflation surged to 80% YoY in Apr’21 vis-à-vis 32% YoY in Mar’21.

* WPI inflation in fuel and power was at a more-than-four-year-high of 21% YoY (WPI weight: 13.2%) in Apr’21, against 10.2% YoY in Mar’21. This was largely attributable to mineral oils, as inflation in the other two components – electricity and coal – remained muted.

* Manufactured products (WPI weight: 64.2%) posted an inflation rate of 9% YoY in Apr’21, the highest ever since the second half of FY1996 – it was 7.3% YoY in Mar’21 and just 0.2% in Apr’20. Almost all the heavyweights – such as edible oils, basic metals, chemicals, fabricated metal products, machinery and equipment, electrical equipment, and motor vehicles, among others – posted a sharp rise in WPI inflation in Apr’21 (Exhibit 3).

* Core (non-food manufactured products) WPI inflation also came in at a record high of 8.4% YoY in Apr’21 v/s 7% in Mar’21 (Exhibit 4). This is in contrast to the trend seen in core CPI inflation last month, indicating rising commodity prices only at the wholesale level in Apr’21.

* We expect CPI inflation to inch higher to ~5% by Jun’21, before easing to 3.5% by Nov’21. If so, it could average at 4.5% YoY in FY22, following a 6.2% average in FY21. Overall, the second COVID wave is likely to keep demand muted, and localized lockdowns may cause supply chain disruptions in the coming months. Therefore, we believe the RBI would retain its accommodative stance this year.

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