WPI & CPI Inflation Indices

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.

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

We will explain impact of Rupee depreciation on WPI and CPI in the next edition on Mirae Asset Knowledge Academy Tutorials.     

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