The difference between CPI and WPI based inflation is not only about the point of measurement, consumer or wholesale, but the measurement baskets are drastically different.
Today inflation is high and is eating away returns from our portfolios. Let look at what is driving it and what is the likelihood going forward. There are two gauges of inflation. One is CPI, which is consumer price based and the other is WPI, which is wholesale price based. The Reserve Bank of India, for policy formulation on interest rates, follows CPI inflation. The difference between CPI and WPI based inflation is not only about the point of measurement, consumer or wholesale, but the measurement baskets are drastically different.
The latest data point of CPI, April 2022, was 7.79%. This is definitely high, particularly if we take the yardstick of RBI’s tolerance level of 6%. While oil prices are damagingly high, what is relevant here is the composition of the inflation basket and the relative weightage of items. Food and beverages account for 45.86% of the CPI basket. If we add up 2.38% weightage of pan and tobacco, it is 48.2%. Hence, what is happening to food prices is more relevant for CPI inflation, due to the sheer weightage.
In April 2022, the food and beverages component inflation was 8.1%. Due to the higher weight, it contributed that much to the headline number of 7.79%.
WPI inflation for April 2022 was as high as 15.08%. The item with highest inflation in the WPI basket was fuel and power, showing 38.7% inflation, with a weight of 13.1%. The component of primary articles with a weight of 22.6% shows an inflation of 15.4%, within which crude, petroleum and natural gas with 2.4% weightage had an inflation of 69% in April. The biggest component is manufactured products with a weight of 64.2%, which had an inflation of 10.9% in April.
In this backdrop of global uncertainty, geo-political tensions, sanctions on Russia, high crude oil prices, etc., broadly, inflation is somewhere near the peak. There is concerted effort between the RBI on monetary policy action (interest rate hikes) and the government on fiscal and administrative aspects (excise duty on petrol-diesel, export curbs on wheat, steel, cotton, etc.). On high crude oil prices, there has been some increase in production by OPEC. As the year progresses, some face-saving solutions may be found. In India, monsoon is projected to be normal, which is the saving grace for agricultural production. Food and beverages make up almost half the CPI basket.
Inflation is eating away from your portfolio returns. However, it is not under your control. The parameter for your portfolio construct is your investment objective, and not an external, uncontrollable factor like inflation. Moreover, the inflation headline data we react to, e.g. 7.79% of CPI inflation or 15.08% of WPI, is only a proxy for your inflation. Everybody’s consumption basket is unique. It is unlikely that you will spend almost half your monthly budget on food and beverages. Hence, it is not advisable to tweak your investments in view of high inflation. Real negative returns are bad, but that’s something you cannot control.