the-diversion-in-inflation-indices

Why is it in the news ?

The WPI inflation for October has touched a 40-month low.

  • In contrast to the above, retail inflation in the country for the same month has touched a 16-month high.
  • This deceleration in wholesale prices has happened despite a significant jump in wholesale food prices.

 

Wholesale Price Index

  1. A wholesale price index (WPI) is an index that measures and tracks the changes in the price of goods in the stages before the retail level that is, goods that are sold in bulk and traded between entities or businesses instead of consumers.
  2. It is published by the Office of Economic Adviser, Ministry of Commerce and Industry.
  3. The base year of All-India WPI has been revised from 2004-05 to 2011-12 in 2017.
  4. The weightage  of components in WPI
    1. Manufactured products = 64.2%
    2. Primary articles = 22.6%
    3. Fuel and power = 13.1%

Consumer Price Index

It is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care.

  • Base Year for CPI is 2011-12.
  • Four types of CPI are as follows,
    • CPI for Industrial Workers (IW)
    • CPI for Agricultural Labourer (AL)
    • CPI for Rural Labourer (RL)
    • CPI (Rural/Urban/Combined)
  • Of these, the first three are compiled by the Labour Bureau in the Ministry of Labour and Employment.
    •  Fourth is compiled by the Central Statistical Organisation (CSO) in the Ministry of Statistics and Programme Implementation.

CPI v. WPI

  • WPI, tracks inflation at the producer level and CPI captures changes in prices levels at the consumer level.
  • Both baskets measure inflationary trends but  the two indices differ in weightages assigned to food, fuel and manufactured items.
  • The weightage of food in CPI is far higher (46%) than in WPI (approx 24%).
  • Moreover WPI does not capture changes in the prices of services, which CPI does.
  • In April 2014, the RBI had adopted the CPI as its key measure of inflation.

 

Why is WPI falling and CPI Rising ?

  • It is due to different Weightage of Same Components:
  • For instance, food articles have a much higher weight, over 45 per cent in CPI or retail inflation index while in the WPI their weight is less than 30 per cent.
  • So even a similar spike in prices will show up a much higher impact in the retail inflation index than the wholesale inflation index.
  • Different Components: There are other items such as services which have a weight of about 30 per cent that can only be found in retail inflation. A spike in these prices obviously bumps up only the retail inflation while leaving the wholesale inflation unaffected.