WPI inflation accelerates, but profit margins getting squeezed-The Total Investment & Insurance Solutions

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15  July 2016 

WPI (The Total Investment & Insurance Solutions)

India's wholesale price index (WPI)-based inflation rose to a higher-than-expected 1.6% in June from 0.8% in May entirely driven by food prices. This data from June also reflect weak pricing power of corporates, says Nomura in a report.

The research note says, "Despite rising input costs, manufacturers did not implement commensurate increases of output prices, which reflects increased pressure on profit margins." The Total Investment & Insurance Solutions

Sequentially, prices of several manufactured categories such as machine tools, leather and wood products fell, while textiles rose marginally, reflecting weak pricing power amid the slow domestic recovery and weak external demand. Global deflationary forces (in basic metals, metallic mineral products) added to the downward pressures. However, with waning base effects, core WPI deflation eased to -0.3% y-o-y in June from -0.5% in May. 

Breakdown Of WPI 1 (The Total Investment & Insurance Solutions)

"Indeed, a breakdown of the WPI into input and output prices shows that input costs picked up sharply, rising 1.5% y-o-y (vs 0.3%), but output price inflation was unchanged at 1.6% y-o-y. This suggests that firm profit margins will likely come under pressure as they are absorbing much of the higher input costs," Nomura added. The Total Investment & Insurance Solutions

During June, the core WPI deflation (WPI manufactured ex-food) eased, in line with expectations. Core WPI deflation eased to -0.3% y-o-y in June from -0.8% y-o-y in May. However, sequentially, prices of several manufactured categories fell or were muted. The Total Investment & Insurance Solutions

WPI food price inflation (primary and manufactured) rose further to 8.2% y-o-y in June from 7.8% in May. Sequentially, the pace of pick-up in vegetables (17.1% m-o-m), cereal (1.9%) and edible oil (1.2%) prices accelerated. "Food inflation has doubled over the span of four months, contributing significantly to the rise in WPI. Although food prices typically rise in summer months, the pick-up this June was much higher than normal, at 2.3% m-o-m average over the last three years," the report pointed out. The Total Investment & Insurance Solutions

Breakdown Of WPI 2 (The Total Investment & Insurance Solutions)

Non-food primary products such as fibre and mineral prices rose amid higher global prices. Fuel price deflation also eased to -3.6% y-o-y from -6.1% in May, as prices of almost all market-linked fuels like petrol, diesel, aviation fuel, naptha and furnace oil, picked up sequentially, reflecting the lagged pass-through of higher global fuel prices. The Total Investment & Insurance Solutions

"Looking ahead, we expect year-on-year WPI inflation to continue rising because of waning base effects, albeit at a muted pace given ample manufacturing spare capacity and the recent stabilisation of global commodity prices. For the full year, we expect WPI inflation to average 0.6% y-o-y in 2016, up from -2.7% in 2015," Nomura concluded. The Total Investment & Insurance Solutions