India’s inflation based on both WPI and CPI continued its downward trajectory, reaching a level of 1.3% and 5.7% for March’23, the last month of FY23. However, annual average still remains high; 6.7% for CPI and 9.4% for WPI. With the monetary tightening already done over last 12 months and supply chain constrains largely removed, inflation should be within the acceptable limits going forward. Here is a look at the movement of the inflation and its various components.

Inflation is measured by two main indices – CPI (Consumer price Index) and WPI (Wholesale price Index). For FY23, CPI inflation has surpassed its level in FY21 and is highest since FY15. However, WPI provided some relief, coming down from almost 13% in FY22 to 9.4% during FY23. (Annual inflation is calculated as average value of monthly index divided by average value during the previous year). On monthly basis, WPI had shown a wide range, peaking at 16.6% in May’22, coming down to 6% by Nov’22 and just 1.3% by March’23. In contrast, CPI was relatively stable, peaking at 7.8% in April’22, the first month of FY23 and coming down to 5.7% by March’23. The sharp increase in monthly inflation in April’22 had forced MPC to start its monetary tightening. While CPI primarily measures the price movement of consumption goods & services, WPI measures price movement of all goods produced in the economy. Even though MPC (Monetary Policy Committee) is guided by the movement of CPI, it is WPI which carries greater significance from macroeconomic perspective.

WPI is divided into three groups – Primary articles (PA) with weightage of 23%, Fuel & Power (13%) and manufactured products (MP). MP has weight of 64% and is further divided into 20 subgroups, such as manufacture of textiles, chemicals, metals, machinery, transport vehicles etc. In all, WPI inflation is calculated based on the movement of about 700 different products including 90 food articles. The weightage is assigned broadly based on the share of items in GDP. MP inflation is broadly what could be called ‘core inflation’ and displays relatively stable trend unlike food & fuel.

Inflation for MP group stood at 5.6% in FY23, sharp relief from a peak of 11.1% in FY22. Even though most manufactured products faced lower demand and lower capacity utilization, prices recorded significant increase due to Covid-induced supply chain disruption and rise in commodity prices. Prices were significantly stable before that ranging from -1.8% to 3.6% between FY13 and FY21. Among the biggest contributors over last two years are manufacture of chemicals & chemical products at 9%, down from 13% in FY22 and metals at 6.2% (26% in FY22!). Metal prices inflation was driven by iron ore prices which rose by 53% in FY22 but have declined by 27% in FY23. An interesting aspect of inflation at subgroup level is significant degree of correlation between certain groups since output of one serve as input to another. For instance, manufacture of chemical products and textiles show a correlation of 94% and 86% with crude oil during FY13-23. This is so because crude oil and natural gas serve as feedstock for large number of these items and therefore, their prices vary accordingly. On the other hand, despite the sharp price increase in metals, sectors dependent on them such as machinery, transport vehicle, other transport vehicles have not shown similar price increase. Correlation of these sectors with metals ranges from 25-55%. This could be because metals form relatively small part of their total cost of production. Only electrical machinery shows a somewhat high correlation of 75% with metals.

Primary articles, the other component of WPI, comprises of food articles, non-food articles such as cotton, silk, oil seeds and minerals such as iron ore, copper etc. Crude oil and natural gas are also part of primary articles group. Broadly, PA are items grown or extracted from earth and processed before being used/consumed. Fuel & Power comprises of items which are used as a source of fuel. So, coal, which is also extracted from earth but directly used as fuel is classified under this. Other items within this are electricity, petrol, kerosene, ATF etc.

Inflation for both of these groups has been high with Fuel & Power averaging 28% in FY23 on top of 33% in FY22. Primary articles inflation stood at 10%, almost the same at FY22. Within this, food grains inflation rose to 9.2% from 2.6% in FY22, a result of scarcity due to Russia-Ukraine war. An unfortunate characteristic of food and fuel inflation is their sharp volatility. Fuel inflation has ranged from -20% to 33% since FY13 whereas food inflation varied between 0.3% and 12.3%. The volatility makes the task of managing inflation that much tougher. An achievement worth mentioning is increase in domestic production of pulses which has helped manage its price. Inflation for pulses had gone up to 35% in FY16 which came down after that with prices still being down about 18% from its peak.

CPI index is divided into six broad groups – Food, Fuel & Light, Housing, Pan & Tobacco, Clothing & Footwear and Miscellaneous which includes health, education, transport etc. Food and Fuel, together, account for 53% of weightage in calculation and drive the movement of CPI. As in case of WPI, inflation for both these groups in CPI also shows similar trend. Among other groups, clothing and transport recorded inflation of 10% and 6%, again, driven by inflation in petroleum and petrochemical products. Even though CPI comprises of limited number of items and may appear to be a less onerous exercise, it is calculated separately for all states and union territories totalling 36 in number and for both rural and urban region. For March’23, highest inflation in rural area was 7.6% in Haryana and lowest in Chhattisgarh at 1.6%. In urban area, highest was 7.96% in Uttarakhand and lowest was 2.4%, again in Chhattisgarh.

An interesting aspect of discussion around inflation is low correlation of just 32% between CPI and WPI. (WPI was also lower than CPI in 8 out of 9 years by over 3 percentage points till FY21). This is because of different weights of food and fuel group and absence of manufactured group in CPI which gives stability to WPI. While weights of these two groups is 53% in CPI, it is only 35% in WPI. While WPI gives a better indication of inflation trend of the economy as a whole, CPI is given more importance to better address the impact of inflation on common people.

To sum up, Covid disruption led to sharp increase in prices over last 2-3 years. CPI, which stood at over 9.5% in FY13-FY14, came down to average of 4.2% during FY16-20 but moved up to 6.1% in FY21-FY23. Similarly, WPI, which averaged 6% in FY13-FY14, came down sharply to 1.4% during FY15-21 but has risen to over 11% in FY22-FY23. However, the pricing pressure appears to be easing as reflected in 5-month average which is down to 6% for CPI and 4.2% for WPI. Except for fuel prices, which tends to show large volatility and any fresh geopolitical disturbance, inflation may not pose any significant risk to Indian economy.

FY23 Inflation Data

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