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Wholesale Price Index and Consumer Price Index

Wholesale Price Index and Consumer Price Index

(WPI) Wholesale Price Index  and Consumer Price Index : The All-India Consumer Price Index Numbers for Agricultural Labourers and Rural Labourers for the month of January, 2021 has been released.

Analysis

  • The fall/rise in index varied from State to State. In case of Agricultural Labourers, it recorded a decrease of 1 to 20 points in 18 States and an increase of 15 points in Kerala State whereas index of Madhya Pradesh State remained stationary.
  • In case of Rural Labourers, it recorded a decrease of 2 to 20 points in 17 States and an increase of 2 to 15 points in 2 States whereas index of Madhya Pradesh State remained stationary.

Analysis

  • Inflation is the sustained increase in the prices of goods and services over time. These are the two primary measures of inflation – The wholesale Price Index and  Consumer Price Index.

Wholesale Price Index

  • WPI index reflects the average price changes of goods that are bought and sold in the wholesale market.
  • WPI in India is published by the Office of Economic Adviser, Department of Industrial Policy and Promotion, Ministry of Commerce and Industry.
  • Further, the data for WPI is monitored and updated on a monthly basis taking into account all the items that form the index.
  • 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.
  • An important point to take note of is, the wholesale price index (WPI) does not include the cost of services (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.
  • 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.
  • The measure of wholesale price gains is the key deflator in computing the Index of Industrial Production and is also used to deflate Gross Domestic Product at current prices.
  • 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.
  • WPI basket does not cover services.

The main uses of WPI are the following:

  • 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 used as deflator for many sectors of the economy including for estimating GDP by Central Statistical Organisation (CSO).
  • WPI is also used for indexation by users in business contracts.
  • Global investors also track WPI as one of the key macro indicators for their investment decisions.

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.

How does the Consumer Price Index help?

  • 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 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.
  • 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.
  • CPI inflation is also called as ‘retail inflation’ as the prices are quoted from retailers.
  • CPI is based on retail prices and this index is used to calculate the Dearness Allowance (DA) for government employees.

Table: Different Price Indices in India

IndexAgencyBase Year
WPIOffice of Economic Affairs, Ministry of Commerce and Industries2011-12
CPI All India, CPI -Urban and RuralCSO, Ministry of Statistics and Programme Implementation2012
CPI-AL 

Labour Bureau, Ministry of Labour and Employment

1986-87
CPI-RL1986-87
CPI-IW2016

The divergence between Wholesale Price Index and Consumer Price Index 

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.

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.

Why CPI?

  • CPI data are available with the same lag as WPI.
  • CPI is also being updated with a new base frequently.
  • Since the control of inflation is aimed at minimising the impact of rising prices on the people.

Do you know?

  • Inflation can be described as the general rise in the price of goods and services in an economy over time.
  • The net effect of inflation is that the value of your money decreases over time, so make sure to align and diversify your investments so that you can inflation-proof your corpus.
  • Headline inflation is the raw inflation figure reported through the Consumer Price Index (CPI).
  • Core inflation removes the CPI components that can exhibit large amounts of volatility from month to month, which can cause unwanted distortion to the headline figure.
  • The most commonly removed factors are those relating to the cost of food and energy.
  • Inflation is deliberately undertaken to relieve depression- Reflation
  • Rise in prices with little change in output- Stagflation is when economic growth is stagnant but there still is price inflation.
  • Price rise at full employment- Continuous inflation
  • The term ‘benign inflation’ implies a mild rate of inflation.

Office of the Economic Adviser (OEA)

  • It is an attached office of the Ministry of Commerce & Industry.

The main functions of the Office of Economic Adviser include, inter alia the following:

Policy Functions

  • Economic policy inputs on industrial development.
  • Rendering advice relating to formulation of Industrial Policy, Foreign Trade Policy with respect to industrial sector in general with thrust on manufacturing, issues relating to bilateral and multilateral trade, as well as taxes and duties related to industry, including but not restricted to safeguard and anti-dumping duties.
  • Analysis of trends of industrial production and growth.
  • Examination of multilateral and bilateral issues and processing Policy Notes with economic implications referred to the Office.

Statistical Functions

  • Compiling and releasing monthly Wholesale Price Indices
  • Compiling and releasing monthly Index of Core Industries Production
  • Developing other Indices on an experimental basis, e.g. select business service price indices
  • Supervising as a ‘source agency’, a compilation of monthly production statistics for identified industrial items, their validation, and onward transmission for computation of the monthly Index of Industrial Production (IIP) by Central Statistics Office.
  • Monthly Statistical compilation of macro indicators (secondary information).

 

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