Inflation globally has become a sticky point for policymakers over the last year: the dominant narrative behind rising inflation has been a surge in input prices, arising from supply chain constraints that emerged with pandemic-induced restrictions, followed by the Russia-Ukraine war.

Surging input prices show up in retail inflation, as producers ‘pass-through’ these increases. Precisely to identify the extent of input price pressures faced by producers, and further understand the pace of passthrough to end-consumers, we have segregated the wholesale price index (WPI) into input and output WPI. We use the WPI as it captures prices of goods used as inputs for producers, as well as those of finished goods sold in the wholesale market, unlike the consumer price index (CPI), which only measures output prices in the retail market.

Our analysis of the disaggregated WPI shows that while input prices have climbed down from their highs of earlier in the fiscal, output prices have remained sticky in comparison.

The input WPI surged further in early 2022 as commodity prices (crude oil, fertilisers, wheat, metals) ballooned because of the Russia-Ukraine war.

In fact, input WPI was higher than output WPI (ratio of over 1) between March and September 2022, peaking in May.

The margin pressure on producers was also evident in subdued corporate earnings results: though revenue increased 15% on-year in the second quarter of this fiscal, profitability declined 300 basis points (bps), largely because of high input costs and a delay in passing those on to consumers (CRISIL MI&A Research, October 2022).