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Understanding the difference between WPI and CPI

24 Dec, 2014

 

We generally hear our folks commenting that the cost of certain goods or services which were Rs. X, two or three years ago now cost about 15-20 % and sometimes as high as 40 -50 % more. In simple terms, this phenomenon where there is reduction in the purchasing power per unit of money is described as “inflation”.

As per the data obtained from Indian Ministry of Statistics and Programme Implementation, the annualized inflation in the country is clocked at 6.4 % (as of September 2014) in comparison to 9.6 % in June 2011.

High inflation (generally known as Hyper Inflation) stunts growth and lowers the overall currency value. Thus, the government’s continual effort is to keep the inflation low and stable. 

Typically, there are two indexes used to measure inflation in India:

Wholesale Price Index ( WPI)

Consumer Price Index ( CPI)

These indices are released on monthly, quarterly and yearly basis for national level as well as for state/UT level.

Wholesale Price Index (WPI)

This index is published by office of Economic Adviser (Ministry of Commerce & Industry).The calculation is done by tracking the average prices of commodities that are traded in bulk i.e. wholesale. 

The commodities under study are divided into three categories: primary articles (food, non-food, tobacco, fodder and minerals), fuel & power and manufactured products. Currently, the total basket of products under consideration for WPI is 676 items and the calculation of this index is done by using Laspeyres formula (it works on averaging principle) and year (2004-2005) commodity prices are taken as base for reference by equating them to 100  and values of the index are  calculated as a percentage relative  to this base. 

Consumer Price Index (CPI)

This index is published by Central Statistics Office (CSO) (Ministry of Statistics and Programme Implementation).In nations like United Kingdom, Poland, Malaysia etc. it is also known as Retail Price Index. CPI is a method that involves calculation of inflation through time tracking of weighted averages of 200 consumer goods and services with prices of year 2010 as the base. 

So which is the better index for measuring inflation? 

The primary disapproval for WPI being used as the key index for estimating inflation is that the general public doesn’t transact on wholesale level on a daily basis. Also, the wholesale doesn’t reflect the pricing trends at retail level and thus, not the definitive ideal indicator of inflation.

On the other hand, many analysts feel that CPI is the accurate method of measuring inflation since it reflects the ground realities by tracking the costs of the goods that are purchased on daily basis by general public.

The difference between Wholesale Price Index (WPI) and Consumer Price Index (CPI) is that along with tracking prices of goods, the latter also includes services in the indexing. 

Most of the countries use CPI as the measuring index since it represents actual variation in prices of the items that a consumer will ultimately make use of. Also, CPI has an updated base in comparison to WPI.

Earlier, RBI had given more weightage to WPI as a measurement index. However, on April 2, 2014 during the first bimonthly monetary policy for FY2014-15, Mr. Rajan (RBI governor) declared that CPI would be the key index of inflation measurement going forward.

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