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Base effect drives inflation higher…

WPI inflation increases to 27-month high of 4.2% in Feb 2021: Wholesale inflation, which has been increasing consistently since Sep 2020, jumped to 27- month high of 4.2% in Feb 2021 up from 2% in Jan 2021 and 2.3% in Feb 2020. Sharp rise in wholesale inflation in recent months has pushed up average WPI during the first eleven months of FY21 to 0.6%. In Feb 2021, most of the year-onyear increase in wholesale inflation was driven by manufactured product prices. Out of the 190bps increase in year-on-year inflation between Feb 2021 and Feb 2020, manufactured products contributed 220bps while primary articles and fuel & power subtracted 24bps and 4bps respectively.

* Base effect and monthly momentum contribute equally in sequential increase: Between Feb 2021 and Jan 2021, wholesale inflation increased by 220bps. In this, base effect contributed 100bps while month-on-month momentum contributed 110bps. The base effect during Mar – May 2021 is unfavourable (as WPI inflation had fallen sharply during Mar – May 2020) which is likely to provide upward bias to wholesale inflation during the said months.

* WPI Food inflation falls to 3.3%; aided by lower primary food prices: WPI Food inflation (which is a combination of ‘primary articles: food’ and ‘manufactured food’) fell to 3.3% in Feb 2021 from 7.2% in Feb 2020 but up from -0.2% in Jan 2021. The main driver of this decline was ‘primary articles food’ inflation which fell to 0.85% in Feb 2021 from 4.8% in Feb 2020 while manufactured food inflation broadly remained unchanged (2.6% in Feb 2021 vs 2.4% in Feb 2020). If this trend of lower input food prices compared to rising manufactured food prices continues, it bodes well for food manufacturing companies profit margins.

* Primary articles inflation falls to 1.8% in Feb 2021 from 6.5% a year ago: Primary articles inflation fell to 1.8% in Feb 2021 from 6.5% in Feb 2020 as major components of the index recorded sharply lower inflation. Index heavyweight food inflation came in at 1.4% in Feb 2021 from 7.7% in Feb 2020 while non-food inflation also decelerated by 300bps y/y to 3.9%.

* Fuel & power inflation also falls to 0.6%: Fuel & power inflation also fell to 0.6% in Feb 2021 from 3.1% twelve months ago. Index heavyweight mineral oil recorded 0.9% inflation in Feb 2021 down from 1.1% a year ago while coal inflation fell to 0.4% from 2.3% in Feb 2020. However, the biggest driver of lower fuel & power inflation was electricity which fell to just 0.3%, sharply down from 7.8% a year ago.

* Manufacturing inflation surges to 5.8% in Feb 2021; metals prices are showing signs of easing: Manufacturing inflation fell sharply to 5.8% in Feb 2021 from 0.5% twelve years ago. The recent surge in manufacturing inflation has been driven by sharp increase in base metals prices. In Feb 2021, out of the total manufacturing inflation of 580bps, base metals alone contributed 200bps (~34%), more than double than their weight of 15% in the manufacturing basket. Our in-house metals composite index inched up 25% y/y in Feb 2021, recording the fifth consecutive double-digit price increase. However, metal prices are showing signs of easing. The 25% increase in our in-house metal composite index came on the back of 35% and 29% increases in the preceding two months. Food contributed 100bps to manufacturing inflation followed by chemicals (60bps) and textiles (50bps).

* Wedge between WPI and CPI narrowest since May 2019: The difference between wholesale and retail prices, which can be perceived as an indicator of retail margins and ease of movement of goods, narrowed to their lowest level since May 2019. In Feb 2021, the wedge was just 90bps. It should be noted that during the early months of ‘hard lockdown’, CPI exceeded WPI by as much as 960bps.

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