Wholesale Price Index (WPI) Vs Consumer Price Index (CPI): Composition, Methodology, and Uses

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Introduction:

  • The government is considering changing the base year for key economic indices to FY23 and revamping several datasets to better reflect structural changes in the economy.
  • Currently, measures such as the Index of Industrial Production (IIP), Wholesale Price Index (WPI), and National Income are benchmarked to FY12, with the previous base year being FY05. The Consumer Price Index (CPI), a widely followed price benchmark, also uses 2012 as its base year.
  • Inflation is the sustained increase in the prices of goods and services over time. There are the two primary measures of inflation: Wholesale Price Index and Consumer Price Index.

Wholesale Price Index (WPI)

  • WPI index reflects changes in the average price of goods (unlike CPI, WPI does not cover services) that are bought and sold in the wholesale market.
      • At the wholesale level, commodities sold in bulk and traded between businesses or entities rather than goods bought by consumers.
  • WPI in India is published by the Office of Economic Adviser, Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, on a monthly basis.
  • The base year for the WPI index has been revised for the seventh time from the earlier 2004-2005 to 2011-12 to better capture changes in the economy.

a) Composition of WPI

Wholesale Price Index (WPI)
Major Groups Weight (%)
All Commodities 100
I. Primary Articles 22.6
II. Fuel & Power 13.2
III. Manufactured Products 64.2
Food Index 24.4
  • The various commodities taken into consideration for computing the WPI can be categorized into primary article, fuel and power, and manufactured goods with corresponding weightages as 22.62%, 13.15% and 64.23% respectively.
      • Primary articles included for the computation of WPI include food articles, non-food articles and minerals.
      • WPI food index (Weight 24.38%) consists of ‘Food Articles’ from Primary Articles group and ‘Food Product’ from Manufactured Products group.
  • The index basket of the present 2011-12 series has a total of 697 items including 117 items for Primary Articles, 16 items for Fuel & Power and 564 items for Manufactured Products.
      • The prices tracked are ex- factory price for manufactured products, mandi price for agricultural commodities and ex-mines prices for minerals.
      • Weights given to each commodity covered in the WPI basket is based on the value of production adjusted for net imports.
  • An important point to take note of is, the wholesale price index (WPI) does not include the cost of services (the Consumer Price Index, CPI, includes certain services too); we cannot buy services on a wholesale basis.
  • Further, as WPI accounts for changes in general price level of goods at wholesale level, it fails to communicate actual burden borne by the end consumer.
  • The pricing norms of wholesale and retail are also different.
      • Certain items on WPI, such as fuel, are also closely linked to international prices, creating a gap between the figures on this index and the CPI.

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b) Main uses of WPI

  • It provides estimates of inflation at the wholesale transaction level for the economy as a whole. This helps in timely intervention by the Government to check inflation in particular, in essential commodities, before the price increase spill over to retail prices.
  • WPI is the key deflator in computing the Index of Industrial Production and is also used to deflate (price adjust) Gross Domestic Product at current prices.used as deflator for many sectors of the economy including for estimating GDP by Central Statistical Organisation (CSO).
      • A deflator is used to adjust the value of sales to remove the effect of price changes, showing only changes in the volume/quantity sold .
      • Example: If in one year the value of sales of a product has gone up from 100 to 120, by 20 %, but its unit price during this year has increased from 100 to 110, by 10 %, this unit price change (110) can be used as a deflator of the sales index (120), resulting in a volume change from 100 to 109.1 (+ 9.1 %): 120 / 110 * 100 = 109.1
  • Global investors also track WPI as one of the key macro indicators for their investment decisions.
  • Business organisations, policymakers, accountants, and statisticians use WPI as an indexing tool to formulate price adjustment clauses.
  • Note: WPI captures the average movement of wholesale prices of goods and is primarily used as a GDP deflator. WPI (2011-12) reckons only basic prices and does not include taxes, rebate/trade discounts, transport and other charges.

Consumer Price Index (CPI)

  • Consumer Price Index is an index measuring retail inflation in the economy by collecting the change in prices of most common goods and services used by consumers.
  • Figures of CPI-based inflation are issued every month in India.
  • The index assigns different weights to various goods and services in the basket and tracks the movement of their prices.
  • It also tracks the price movement of the entire basket on a pan-India level to calculate the overall inflation figure or CPI inflation.
  • While CPI is the most relevant index for the consumer as it shows the increase in their actual outgo, it is not a completely accurate cost of living indicator since it focuses on certain goods and services more than others.
      • CPI is not the cost of living index, and is, therefore, not an accurate reflection of consumer spending.
      • The weightage of food in the CPI is close to 50%, but most households don’t spend nearly that much of their overall expenditure on food. What we spend more on are services such as education, health care and transportation, where inflation levels are much higher.

a) Types of CPI Indices

  • Two Ministries – Ministry of Statistics and Programme Implementation (MOSPI) and Ministry of Labour and Employment (MOLE) are engaged in the construction of different CPIs for different groups/sectors.
Table: Different Price Indices in India
Index Agency Base Year
WPI Office of Economic Affairs, Ministry of Commerce and Industries 2011-12
CPI All India, CPI -Urban and Rural Central Statistical Organisation (CSO), Ministry of Statistics and Programme Implementation 2012
CPI-AL  

Labour Bureau, Ministry of Labour and Employment

 1986-87
CPI-RL 1986-87
CPI-IW 2016
Abbreviations:

  • CPI for Industrial Workers (CPI-IW),
  • CPI for Agricultural Labourers (CPI-AL),
  • CPI for Rural Labourers (CPI-RL), and
  • CPI for Urban Non-Manual Employees (CPI- UNME).

b) Uses of Consumer Price Index (CPI)

      • The CPI numbers in India are widely used:
      •  i) as a macroeconomic indicator of inflation,
      • ii) as a tool for inflation targeting by the RBI,
      • iii) for monitoring price stability by the government,
      • iv) for indexation of dearness allowance to employees, and
      • v) as deflator for national accounts.
  • The Reserve Bank of India and other statistical agencies study CPI so as to understand the price change of various commodities and keep a tab on inflation.
  • CPI inflation is also called as ‘retail inflation or headline inflation’ as the prices are quoted from retailers.
  • Apart from measuring inflation in retail prices, the CPI for Industrial Workers (IW) (CPI-IW) is used to regulate the dearness allowance of government employees and industrial workers, as well as fixing and revising minimum wages in scheduled employments.
  • CPI is also a helpful pointer in understanding the real value of wages, salaries and pensions, the purchasing power of a country’s currency; and regulating prices.
  • The CPI data, however, masks the real extent of price pressures across major product categories.

c) Causes of divergence between CPI and WPI inflation

i) Food inflation

  • Traditionally, the major reason for the CPI inflation being higher than WPI inflation has been that food articles had a higher weight (48.3 per cent) in CPI than in WPI (24.3 per cent).
      • This factor plays an important role, whenever the primary trigger of inflation is food inflation.

ii) Non-food inflation

  • Non-food inflation according to WPI and CPI have very different composition.
  • Fuel and power category has a much bigger weight in WPI (14.9 per cent) than in CPI (6.8 per cent). What is included in this category also differs very much.
  • Similarly, manufactured goods are given more weightage in the wholesale basket. Therefore, any movement in the price of such items will move the WPI more than it does the CPI.
  • In fact, this divergence is inexplicable. There are certain items which figure in CPI but do not figure in WPI. These may be broadly treated as ‘services’.

Does RBI use WPI or CPI Inflation to manage monetary policy?

  • While earlier the Reserve Bank of India used WPI inflation to manage monetary policy expectations, it is now the CPI inflation which is largely taken into account. This is because:
      • CPI data are available with the same lag as WPI.
      • CPI is also being updated with a new base frequently.
      • The control of inflation is aimed at minimising the impact of rising prices on the people. 

Practice Questions for Mains

Topic: Indian Economy and Related Issues (GS Mains Paper 3)

  • Discuss the key differences between Wholesale Price Index (WPI) and Consumer Price Index (CPI) in terms of their composition, methodology, and uses. Evaluate their respective importance in economic policy and inflation measurement in India. (Answer in 250 words)

Model Answer

Introduction:

  • The Wholesale Price Index (WPI) and the Consumer Price Index (CPI) are pivotal in understanding inflation and guiding economic policy in India, yet they differ significantly in composition, methodology, and uses.

Composition and Methodology:

  • WPI measures the price changes at the wholesale level. It includes prices of goods traded between businesses, capturing the cost of bulk transactions before reaching the retail level. WPI covers a broad range of goods, including primary articles, fuel, and manufactured products. It does not include services.
      • Conversely, CPI measures the price changes from the perspective of the consumer. It includes a basket of goods and services consumed by households, reflecting the retail prices. CPI is divided into various categories such as food and beverages, housing, clothing, and education. Unlike WPI, CPI encompasses services like healthcare and education, providing a more comprehensive measure of cost-of-living changes.

Uses:

  • WPI is primarily used for macroeconomic analysis and as a deflator in national accounts. It helps gauge the price changes in the production and wholesale sector, making it useful for policy-making related to industrial and wholesale trade sectors. WPI data can influence government decisions on pricing policies, subsidies, and economic reforms.
      • CPI, on the other hand, is crucial for determining the inflation rate as experienced by consumers. It directly impacts monetary policy decisions by the Reserve Bank of India (RBI). CPI data influences interest rate decisions, social welfare policies, and adjustments in salaries and pensions to keep up with inflation. It is also used for inflation targeting, making it integral to maintaining price stability and purchasing power.

Importance in Economic Policy and Inflation Measurement:

  • Both indices are essential for different aspects of economic policy. WPI’s importance lies in its ability to reflect price trends at the wholesale level, affecting supply chain dynamics and industrial pricing strategies. However, its exclusion of services and lesser representation of consumer expenditure limits its scope in inflation targeting.
      • CPI is more reflective of the actual inflation experienced by the public, thus holding greater significance for monetary policy. The RBI primarily uses CPI to set interest rates aimed at controlling inflation and ensuring economic stability. CPI’s comprehensive inclusion of goods and services makes it a more accurate gauge of price changes impacting the general populace.

Conclusion

  • In summary, while WPI provides valuable insights into wholesale price movements and industrial price dynamics, CPI is more crucial for understanding consumer inflation and guiding monetary policy. Both indices, despite their differences, together offer a fuller picture of the inflationary trends and economic health of the country.

 

References:

 

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