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WPI rises to 9-month high in Dec’23

Mainly led by an uptick in primary food articles

* The Wholesale Price Index (WPI)-based inflation came in the positive territory in Dec’23 for the second month in a row. It grew 0.7% YoY in Dec’23 vs. 0.3% in Nov’23. Sequentially, WPI contracted 0.9% in Dec’23 vs. an increase of 0.2% MoM in Nov’23. The number was lower than the Bloomberg consensus of 1.4% and our forecast of 1.1%. (Exhibit 1)

* The acceleration in WPI was primarily due to a rise in prices of primary articles and fuel and power items, partly offset by a decline in prices of non-food manufacturing products.

* Inflation in primary articles went up to 5.8% YoY (the highest in 4 months) in Dec’23 vs. 4.8% in Nov’23. Within primary articles, prices of food items increased 9.3% in Dec’23 from 8.2% in Nov’23, while prices of non-food articles declined 4.7% YoY in Dec’23 vs. a decline of 3.2% in Nov’23. WPI, excluding food, contracted by 1.1% in Dec’23. (Exhibit 2)

* Additionally, WPI for fuel and power increased in Dec’23, though remained in the contractionary territory (-2.3% in Dec’23 vs. -4.6% in Nov’23). This was mainly due to a rise in prices of mineral oil.

* On the other hand, WPI for non-food manufacturing products remained in the contractionary zone for the tenth month in a row. It declined 0.6% YoY in Dec’23 (vs. a fall of 0.5% in Nov’23). Prices of textiles, paper products, chemical products, basic chemicals, fertilizers, rubber & plastic and basic metals contracted during the month.

* Details suggest that the acceleration in WPI was mainly led by a rise in agro inflation. Agro inflation went up to a 4- month high of 6.4% in Dec’23 vs. 5.9% in Nov’23. At the same time, agro input inflation contracted 4.6% YoY in Dec’23 vs. a contraction of 6.3% YoY in Nov’23. Consequently, agricultural terms of trade grew at a decent but lower pace of 11.5% in Dec’23 (vs. 13% in Nov’23). (Exhibit 4)

* Additionally, non-agro domestic inflation stood at 0.7% YoY in Dec’23 vs. 0.8% YoY in Nov’23. On the other hand, imported inflation contracted for the 11th consecutive month in Dec’23, printing -2.3% YoY vs. -3.4% YoY in Nov’23. (Exhibit 3)

* We expect headline WPI to rise in 2HFY24 as the favorable base effect fades. During Apr’23-Dec’23, WPI averaged -1.1%. We expect WPI inflation at -0.4% YoY for FY24.

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