WPI: Gas and power at the core

The Wholesale Price Index (WPI) for February 2024 clocked in at 18.66 percent – at a 31-month low, and surely comes as a big respite. This is also the first time in 30 months that the year-on-year WPI change has stayed under 20 percent for any month. Such has been the inflation Bull Run – the early signs of which were given by the heating wholesale prices in 2021, what followed in the next two- and a-bit years is history.

Month-on-month trend in again indicating another round of increase – although the very high base from last year will keep year-on-year growth in check, the peak is well past us. The composition of WPI today is significantly altered from a year ago – as frequent rounds of upward revisions in electricity and gas price for industrial usage take charge.

Gas and electricity have an 11 percent share in the WPI basket – and the combined weighted average contribution to WPI for February 2024 stands at 35 percent, with a 70 percent and 58 percent year-on-year increase reported, respectively. Yet again, it appears the PBS teams have failed to correctly calculate the impact of industrial gas price revision on wholesale prices. Recall that Ogra has recently, with effect from February 2024, issued revised prices for captive industrial power and fertilizer feedstock – both of which will have a telling impact on consumer end prices – and the transmission in case of fertilizer prices especially, will be swift.

It appears the PBS just considers one category of industrial usage of natural gas and ignores all others while tabulating WPI gas price change. Not that, retail prices will wait for the PBS to recognize the same in WPI – because the impact will be visible in the form of increased fertilizer prices immediately, and the any subsequent increase in related products with a lag.

Fuel prices have largely stayed range bound allowing government to maximize the tax revenue, without having to increase retail prices considerably. The relative calm in HSD and furnace oil means the pace of increase in transportable goods will certainly slow – although any decline in prices at pumps is not likely to lead to a reversal in retail prices – given the downward sticky nature of most consumer goods.

A sizeable increase in wholesale prices in textiles and garments should be on way – as the festive shopping season of Eid approaches. Food prices will largely depend on the crop output of Rabi season – the early reports of which have sounded encouraging, if the Ministry of Finance’s word is to be taken on it. Relative ease in import restrictions should also ensure timely availability of raw material for any intermediary goods – and should help relieve pressure off prices.

All said, with yet another IMF program staring right in the eye – there is only one the energy prices are tipped to go in the foreseeable future – and that is north. It will be interesting to see how swift the retail transmission mechanism is due to the entirely changed WPI composition led by energy.