WPI vs CPI

** Important : WPI series has been changed in May 2017 **

Wholesale Price Index (WPI) is based on the price  prevailing in the wholesale markets or the price at which bulk  transactions are made.

• It includes three components
  • Manufactured products = 65% approx (64.2% now)
  • Primary articles = 20% approx (22.6% now)
  • Fuel and power = 15% approx (13.1% now)
• The WPI basket includes 676 (Changed to 697 now) commodities in total- all of these are only goods and whose prices are captured at the wholesale/producer level. The CPI considers inflation at the retail end, while also including services.
• It is measured by Ministry of commerce and industry with base year as 2004-05 (Changed to 2011-12 now).

 

New WPI Series

• Base year has been changed from 2004-05 to 2011-12
• The  number of items covered in the new series of the WPI has increased from 676 to 697.
• Under the primary articles, new vegetables and fruits like radish, carrot, cucumber, bitter gourd, mosambi (sweet lime), pomegranate, jackfruit, and pear have been added.
• Under the mineral group, new items like copper concentrate, lead concentrate and garnet have been added and other items like copper ore, gypsum, kaolin, dolomite, and magnesite have been dropped.
• Under the manufacturing items, 173 new items including conveyer belt, rubber tread, steel cables, tissue paper, and wooden splint have been added, while 135 items like khandsari, poppadom, and video CD players have been taken out.
• Under the new series of WPI, weight of manufactured items has decreased to 64.2 per cent from 64.9 per cent in old series.
• Similarly, the weight of fuel and power has decreased to 13.1 per cent from 14.9 per cent.
• On the other hand, the weight of primary items have increased to 22.6 per cent from 20.1 per cent.

 

Consumer Price Index (CPI) is based on the final prices of goods at the retail level. Because of the wide disparities in the consumption baskets for different segment of consumers, India has adopted four CPIs

• CPI (Industrial Workers)
• CPI (Urban Non- Manual Employees)
• CPI (Agricultural Labour)
• CPI (Rural Worker)

• In India, RBI uses CPI (combined) released by CSO for inflation purpose with base year as 2012.
• The number of items in CPI basket include 448 in rural and 460 in urban

 

Both  these indices are the weighted averages of prices of a specified set of  goods and services.

1. Data on Wholesale Price Index (WPI) is available every week, while data on Consumer Price Index (CPI) is only available every month, so there is a time lag in CPI data availability compared to WPI data availability, which can impact decision making both for RBI and the Government of India, as the previous answer states.
2. In India, we do not have one CPI calculated per se. Earlier, there were 4 CPIs calculated for 4 different sets of workers, and now we have three such CPIs, out of which the most famous is CPI for Industrial Workers (CPI-IW). The others used currently are CPI for agricultural laborers and CPI for rural laborers.

The argument used therefore is that there is no one CPI value which can be used for decision making by either RBI or the Government of India.

3. According to our policy makers/decision makers at RBI and elsewhere, or so it seems, WPI has a broader coverage compared to all the CPIs, in terms of the commodities covered, quotations, larger number of non-agricultural products and tradeable items, which are missing in the CPIs.

Also, interest rates which the RBI controls may not have much of a correlation with high food prices and therefore decision makers may feel that since they can’t target inflation across major sections constituting the CPI, they would rather focus on WPI constituted of goods on whose demand interest rates may have a more significant impact.

4. WPI is calculated on an all India basis, while CPI is calculated for specific centres in India and then this is aggregated to an all India index.

 

Why CPI is better than WPI?

• Conceptually, retail inflation—price rise driven by potential consumer demand and available supply—is a better indicator of inflation for guiding monetary policy decisions than WPI inflation.
• WPI excludes prices of services such as education, healthcare, and rents. However, services now account for nearly 60 per cent of GDP and a vast majority of these services are not traded with other countries. Conversely, the new CPI measure assigns nearly 36% weightage on services and includes price changes in housing, education, healthcare, transport and communication, personal care and entertainment
• WPI assigns nearly 15% and 10.7% weightage for the fuel group and metal and metal products group, respectively.Any sharp movements in international prices of fuels and metals, therefore, lead to sharp changes in WPI.CPI shows the consumer trends of the common man

 

What are recent changes in CPI methodology?

• The Central Statistics Office (CSO), Ministry of Statistics and Programme Implementation has revised the Base Year of the Consumer Price Index (CPI) from 2010 to 2012.
• In this revised series, many methodological changes have been incorporated, in order to make the indices more robust
• The new index will include school uniforms, pyjamas, skirts, infant clothing, kurtas, belle shoes, shoes and chappals as well
• The methodology of calculating inflation will also see a change from the present average method to geometric mean, which will take care of a particular category driving the entire index, an internationally accepted practice

 

What are the implication of these changes?

• These changes reflect the falling share of household expenditure on food and the rising share of the non-food items. In addition, the number of items will also increase from 437 to 448 in the rural basket and from 450 to 460 in the urban basket
• Weightage for food is down from 47.58 percent to 45.86 percent. This means future increases in food prices will impact the index marginally less than in the old CPI. As incomes rise, people spend less on food
• The weightage for housing and clothing are higher.
• The sharp downward reduction in the weightage for fuel – from 9.49 percent to 6.84 percent. This will have the effect of reducing the deflationary impact of recent oil prices decreases – which means overall CPI will look higher than in the old index