WPI Inflation Spike Due to Costlier Food, Fuel

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By admin April 23, 2019 12:51

Context

Wholesale price index (WPI) based inflation increased for the second consecutive month to 3.18 per cent in March 2019. The latest WPI was higher than 2.93 per cent in February 2019 and 2.76 per cent in January this year.

Reasons for the increase in WPI

  • The increase in the WPI has been due to the increase in the food and fuel commodities. This in turn was because of the fact that deflation witnessed in the perishable food items like vegetables from July 2018 to January 2019 turned into inflation in February 2019.
  • Further, there has been increase in the prices of food articles such as pulses, wheat, jowar, bajra, maize etc.
  • Besides, the Fuel and power category also saw increase in inflation to 5.41 per cent, from 2.23 per cent in February.

In this context, let’s review the fundamentals of WPI and also how it differs from the CPI (Consumer Price Index).

WPI

  • It is an index that tracks the changes in the prices of goods in the stages before the retail level.
  • It shows the average price change of goods included in the index and is often expressed as a ratio or percentage.
  • The index basket of the  wholesale price index (WPI) covers commodities falling under the three major groups:

Commodities Weightage in WPI
1. Primary Articles 22.6%
2. Fuel and Power 13.2% (Lowest)
3. Manufactured products 64.2% (Highest)

 

  • It does not include ‘services’.
  • Base year for calculating WPI : 2011-12
  • Publisher:  Office of Economic Advisor, Department of Industrial Policy and Promotion(DIPP), Ministry of Commerce and Industry.

(Note: DIPP is now known as DPIIT, Department of Promotion of Industry and Internal Trade)

Some key points about WPI

  • Inter alia, it is used as deflator for estimating GDP and for indexation by users in business.
  • It does not include indirect taxes to remove impact of fiscal policy.
  • Core inflation WPI is measured by excluding food and fuel which are volatile commodities.

CPI

  • CPI tracks the prices paid by the consumers to measure the rate of inflation.
  • There are three variants of CPI:
  1. CPI Rural
  2. CPI Urban
  3. CPI Combined
  • The index basket of the CPI covers commodities falling under the following categories:

 

Food and beverages (Highest Weightage)
Pan, Tobacco and intoxicants (Lowest weightage)
Clothing and Footwear
Housing (Not accounted for under CPI Rural)
Fuel and Light
Miscellaneous (Including Services)
  • Base year for calculating CPI : 2012
  • Publisher: CSO under Ministry of Statistics and Program Implementation
  • Measurement is done on a point to point basis i.e. current Month over the corresponding month of last year (Same is true for WPI)

Some key points about CPI

  • It is used by RBI to target inflation (and not WPI which was used earlier) and accordingly announce its policy rates. RBI aims to keep the inflation in a range of 2 units above or below a CPI of 4%. It generally hikes the policy rates to bring the inflation down and lowers the policy rate to boost economic growth if the inflation is sufficiently low.
  • Headline Inflation is CPI Combined and includes all categories, whereas Core Inflation is CPI Combined, but excludes volatile commodities such as food and fuel.

 

Vantage Point for PT

  • If during a month the prices of almost all commodities remains nearly constant except the prices of food articles which fluctuate widely almost to same degree at both wholesale and retail level, then which of the following will reflect this change most effectively?
  1.  CPI Headline Inflation
  2.  CPI Core Inflation
  3.  WPI Core Inflation
  4.  WPI

 

Explanation:

The Core inflations don’t factor in food prices and hence, they won’t be reflective of this change. However, the WPI and CPI Headline inflation will both reflect the fluctuation in food prices. If the degree of fluctuations is same at both wholesale and retail levels, then this will reflect better in CPI Headline Inflation as it assigns more weightage to food items. Hence the correct answer is (a).

Read Also: Rise In Foreign Investment In India

admin
By admin April 23, 2019 12:51