To be sure, the December WPI number is different from its November counterpart in an important way, as the index contracted on a month-on-month basis in December unlike in November. This means that the growth in WPI in December is purely a result of it being higher than what it was last year even though prices have fallen between November and December 2023.

The growth in December WPI is driven primarily by food items. The food group, with a share of 24.4% in the WPI basket, saw an inflation of 5.4% in December. This number has increased for three consecutive months and is the highest since August 2023 when it was at 6.2%. Primary food articles, which account for 15.3% of the WPI basket, had a higher inflation rate of 9.4%. While inflation continues to remain high for paddy (10.5% in December compared to 10.4% in November 2023) and pulses (19.6% in December compared to 21.6% in November 2023), wheat inflation entered contraction zone in December (it saw double-digit inflation between November 2021 and February 2023) , bringing some cheer to the government.

Apart from the food group, most major sub-categories in the WPI basket actually saw a contraction prices on both an annual and sequential basis. Manufactured goods, which account for almost two-third of the WPI basket, saw an annual and monthly contraction of 0.71% and 0.21% respectively. While the annual contraction in prices of manufactured goods has been continuous since March 2023, contraction in monthly prices is a first since July 2023.

An analyst reasoned that the number showed that there is no cause for alarm on the inflation front.

“Overall, wholesale price inflation trajectory shows input costs remain under control, and food prices also declined in December capping the upside in headline WPI. This was also reflected in retail, CPI inflation late last week. With core CPI inflation moderating since June 2023, and falling below 4% year-on-year in December (for the first time since March 2020), there is more evidence that resilient economic growth amid reasonably tight monetary conditions has not added to inflation risks. We expect RBI to begin monetary easing from June, with three 25 basis point rate cuts in the current calendar year”, Rahul Bajoria, MD & Head of EM Asia (ex-China) Economics at Barclays in his research note.

The CPI headline inflation print came in at 5.7% in December 2023, up from 5.5% in the month-ago period. Inflation increased for the first time during the pandemic in February 2019, when the reading was at 2.6%, marginally higher than 2 % in the preceding month. Prices had risen at a pace as high as 7.79% in April 2022, when the repo rate had been at 4% since May 2020. The RBI began a series of rate rises to control the rising inflation, starting from a 40 basis points hike in May 2022 in response to the April 2022 inflation number. A series of monetary tightening actions followed, leading to the policy rates increasing 250 basis points by February 2023, when the repo rate reached 6.5%. With the December 2023 monetary policy committee meeting concluded, the RBI has kept rates unchanged for 10 months now.

One basis point is a hundredth of a percentage point

December’s WPI print also means that the cumulative growth in WPI in the first three quarters of 2023-24 (April 2023 to December 2023) still shows a contraction of 1.08%. It remains to be seen whether WPI will remain in contraction zone for all of 2023-24, which might have a bearing on GDP deflator and therefore fiscal math of the government. The first advance estimates of GDP which were released on January 7 have put current and constant price growth for 2023-24 at 8.9% and 7.3% respectively. To be sure, it is not a given that an annual contraction should lead to the current price growth being lower than the constant price growth. For example, WPI saw an annual contraction of 3.7% in 2015-16. GDP growth at current and constant prices was 10.5% and 8% in 2015-16. One of the reasons why the GDP deflator does not show a strict correlation with WPI is that the latter does not track cost of services which account for more than half of India’s Gross Value Added (GVA).