WPI & CPI Inflation Indices

Mirae Asset Knowledge Academy

In economics, Inflation means a rise in general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Thus, inflation results in loss of value of money. Another popular way of looking at inflation is "too much money chasing too few goods".

The rate at which the prices of goods and services increases over a particular period of time normally

a year is termed as ‘Inflation Rate’.

Since monetary policies are influenced by inflation and inflationary expectations in the economy it is

therefore, critical that inflation index should be able to predict future inflation with reasonable

accuracy.

Indicators of Measure of Inflation

Whole-sale price index (WPI) and Consumer price index (CPI) are the two primary measures of

inflation.

Whole-sale price Index: - WPI index reflects 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, Ministry of

Commerce and Industry. Further, the data for WPI is monitored and updated on a monthly basis

taking into account all the 679 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.

Primary articles included for the computation of WPI include food articles, non-food articles and

minerals. In the fuel, power, light and lubricants, electricity, coal mining and mineral oil are included.

The manufactured goods category encompasses food products; beverages, tobacco and tobacco

products, wood and wood products, textiles, paper and paper products, basic metals and alloys,

rubber and rubber products and many others.

ALL COMMODITIES 100.00%

0.00%

I PRIMARY ARTICLES 20.12%

(A) FOOD ARTICLES 14.34%

(B) NON-FOOD ARTICLES 4.26%

(C) MINERALS 1.52%

0.00%

II FUEL & POWER 14.91%

A. COAL 2.09%

B. MINERAL OILS 0.09%

C. ELECTRICITY 0.03%

0.00%

III MANUFACTURED PRODUCTS 64.97%

(A) FOOD PRODUCTS 9.97%

(B) BEVERAGES, TOBACCO & TOBACCO

PRODUCTS 1.76%

(C ) TEXTILES 7.33%

(D) WOOD & WOOD PRODUCTS 0.59%

(E) PAPER & PAPER PRODUCTS 2.03%

(F) LEATHER & LEATHER PRODUCTS 0.84%

(G) RUBBER & PLASTIC PRODUCTS 2.99%

(H) CHEMICALS & CHEMICAL PRODUCTS 12.02%

(I ) NON-METALLIC MINERAL PRODUCTS 2.56%

(J) BASIC METALS, ALLOYS & METAL PRODUCTS 10.75%

(K) MACHINERY & MACHINE TOOLS 8.93%

(L) TRANSPORT, EQUIPMENT & PARTS 5.21%

Source : http://eaindustry.nic.in/Download_Data_0405.html

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.

WPI is the primary measure that is used by the Indian central government for ascertaining inflation as

WPI in contrast to CPI accounts for changes in price at an early distribution stage.

Core Inflation

Core Inflation is WPI Inflation after excluding food and energy prices.

In mid-2012, RBI Governor highlighted that "In our economy, where food constitutes nearly 50% of

consumption basket and fuel has a weight of 15%, can a measure of inflation that excludes them can

be called "Core.

Consumer Price Index

CPI measures price change from the perspective of the retail buyer. It is the real index for the

common people. It reflects the actual inflation that is borne by the individual. CPI is designed to

measure changes over time in the level of retail prices of selected goods and services on which

consumers of a defined group spend their incomes. Till January 2012, in India there were only

following four CPIs compiled and released on national level.

Industrial Workers (IW) (base 2001)

Agricultural Labourer (AL) (base 1986-87)

Rural Labourer (RL) (base 1986-87)

Urban Non-Manual Employees (UNME) (base 1984-85)

These four CPIs reflect the effect of price fluctuations of various goods and services consumed by

specific segments of population in the country. These indices did not encompass all the segments of

the population and thus, did not reflect the true picture of the price behavior in the country as a whole.

Therefore, there was a strong feeling that there is a need for compiling CPI for entire urban and rural

population of the country to measure the inflation in Indian economy based on CPI. Thus, now

Central Statistics Office (CSO) of the Ministry of Statistics and Programme Implementation has

started compiling a new series of CPI for the

CPI for the entire urban population viz CPI (Urban)

CPI for the entire rural population viz CPI (Rural)

Consolidated CPI for Urban + Rural will also be compiled based on above two CPIs

These would reflect the changes in the price level of various goods and services consumed by the

Urban and rural population. These new indices are now compiled at State / UT and all India levels.

Source: - Document by Central Statistics Office Ministry of Statistics and Programme Implementation

Government of India

WPI vs CPI

W.P.I C.P.I

Wholesale price index measures inflation at

each stage of production

Consumer price index measures inflation only at

final stage of production

Wholesale price index is the middle point of the

sum of all the goods bought by the traders

Consumer price index is the middle point of the

sum of all the goods bought by consumers

Wholesale Price Index (WPI), is based on the

price prevailing in the wholesale markets or the

price at which bulk transactions are made

The Consumer Price Index (CPI) is based on the

final prices of goods at the retail level.

There are only few countries that uses WPI to

calculate inflation rates

Many nations have already shifted to using CPI.

There are 679 elementary items included in

WPI, some of which are insignificant & outdated

goods that are considered in WPI

CPI, on the other hand, have well-selected

variables.

Category Weights – Base Year is 2004-05 with

Energy Products having 14.91% weights, food

14.34% while services are not included.

Category Weights – Base Year is 20105 with

Energy Products having 9.49% weights, food

49.71% while services are included with 26.3%

weightage.