Economy : Macro-Cap: The cost shock deepens! by Motilal Oswal Financial Services Ltd
* WPI inflation accelerated to 11.4% YoY in Sep’26 from 9.9% in Aug’26, indicating a sharp broadening of wholesale price pressures. On a month-onmonth (MoM) basis, WPI inflation rose by 1.5% in Sep’26 vs. a 0.7% increase in Aug’26. The increase was broad-based, with higher prices across fuel and power, primary articles and manufactured products. Rising energy and industrial commodity prices, coupled with a sharp increase in primary food inflation, contributed to the acceleration.
* The impact of the West Asia conflict on global energy prices has pushed up crude oil, petroleum products and industrial input costs. However, the passthrough of higher input costs from WPI to CPI is not yet clearly evident. The recent increase in CPI inflation has been driven primarily by food prices, rather than by a broad-based pass-through of higher wholesale input costs. Going forward, if elevated energy and industrial commodity prices persist, their impact could become more visible in CPI during 3QFY27 as higher transportation, logistics, and manufacturing costs feed through to retail prices. A sustained increase in both food and non-food inflation could also risk un-anchoring inflation expectations and trigger second-round price pressures.
* The rise in WPI inflation in Sep’26 was driven primarily by higher energy prices and a spike in crude petroleum and natural gas inflation. Fuel and Power inflation rose to 25.9% YoY in Sep’26 from 22.9% in Aug’26, while inflation in crude petroleum and natural gas surged to 57.3% from 34.4%. Mineral oils inflation rose to 40.0% in Sep’26 vs. 38.5% in Aug’26, while coal and lignite inflation increased to 9.3% in Sep’26 from 1.6% in Aug’26.Therefore, imported inflation surged to 17.8% YoY in Sep'26, up from 15.0% YoY in Aug'26.
* WPI food inflation accelerated to 8.6% YoY in Sep’26 from 7.1% YoY in Aug’26, reflecting a sharp increase in primary food inflation. Inflation in primary food articles rose to 8.1% in Sep’26 from 5.7% in Aug’26. In contrast, inflation in manufactured food products moderated marginally to 9.4% in Sep’26 (from 9.7% in Aug’26), although it remained elevated. The persistence of elevated manufactured food inflation indicates that processing, packaging and other production costs remain important sources of inflationary pressure throughout the food supply chain.
* Inflation in manufactured products rose to 9.8% YoY in Sep’26 from 8.4% YoY in Aug’26. Inflation accelerated across basic metals (17.0% vs 10.9%), chemicals (16.7% vs 14.3%), textiles (13.9% vs 12.6%), rubber and plastic products (13.5% vs 11.2%), and electrical equipment (11.9% vs 11.1%) in Sep’26 compared with Aug’26. The spike in metals and chemicals inflation is particularly significant given their role as intermediate inputs across several industries. If these pressures persist, manufacturers may face a combination of margin compression and higher selling prices, depending on demand conditions and their ability to pass on increased costs.
* Agricultural terms of trade improved in Sep’26, with the contraction narrowing to 2.4% in Sep’26 from 4.0% in Aug’26. Nevertheless, the terms of trade remained in contraction, indicating that pressures on agricultural profitability have not fully dissipated. The impact on farm incomes will continue to depend on movements in agricultural output prices relative to input costs, alongside crop-specific realizations and supply conditions.
* Output Producer Price Inflation (OPPI) accelerated in Sep’26, rising to 11.4% YoY in Sep’26 from 9.8% in Aug’26. Inflation increased in mining and quarrying (21.3% in Sep’26 vs 15.1% in Aug’26), manufactured products (12.6% vs 11.0%), and agriculture, forestry and fishing (8.5% vs 7.3%), while deflation in electricity prices narrowed (-0.3% in Sep’26 vs -1.7% in Aug’26). Within manufacturing, inflation rose in coke and refined petroleum products (39.6% in Sep’26 vs 37.9% in Aug’26), chemicals (16.7% vs 14.2%), textiles (16.1% vs 14.4%), rubber and plastic products (14.1% vs 11.8%), and basic metals (17.3% vs 11.0%). These trends indicate that selling-price pressures remain elevated across several industrial segments, potentially reflecting higher commodity costs and ongoing price adjustments by producers.
* Input Producer Price Inflation (IPPI) for the manufacturing sector increased to 1.8% MoM in Sep’26 following a 1.2% MoM dip in Aug’26, indicating a renewed increase in manufacturing input costs. The rebound was led by a 9.2% MoM increase in coke and refined petroleum products in Sep’26, following a 13.8% decline in Aug’26. Input prices also increased in chemical products (2.3% MoM in Sep’26 vs 0.8% in Aug’26), rubber and plastic products (1.9% MoM in Sep’26 vs 1.3%), basic metals (1.6% vs 0.2%), electrical equipment (1.3% vs 0.9%) and textiles (1.1% vs -0.2%).
* The combination of rebounding input costs and accelerating output producer prices suggests that cost pressures remain significant. If sustained, these increases could squeeze manufacturers’ margins or lead to higher final-goods prices, depending on pricing power and demand conditions.
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