Linkage between WPI and CPI
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Linkage between WPI and CPI
Context
Wholesale price inflation hit 15.08% in April, the highest since September 1991, having grown at double-digit rates for the 13th month in a row. Meanwhile, inflation based on the consumer price index (CPI), scaled an 8-year high of 7.79% in April and breached the upper band of the RBI’s medium-term target for a fourth straight month.
| Wholesale Price Index | Consumer Price Index | |
| Published by | Economic Advisor in the Ministry of Commerce and Industry. | Central Statistical Office in the Ministry of Statistic and Programme Implementation |
| Definition | It measures the average change in price in the sale of goods in bulk quantity by the wholesaler. | It measures the average change in price in the sale of goods or services in retail or the price of goods or services sold directly to consumers. |
| Constituents | The primary index that tracks the change in wholesale prices of goods only. | The primary index that tracks the change in retail prices of essential goods and services consumed by Indian households |
| Feature | Look at the price at which wholesaler supplies the product | Look at the price at which the consumer buys the product. |
| Stage of transaction | Reflect first stage of transaction-WPI is the first level where the first price increases in goods | Reflect final stage of transaction-CPI is the final level where the price increases of goods or services |
| Items | It is restricted to goods covered under WPI, primarily fuel, power, and manufacturing products. | Education, food, transport, communication, recreation, apparel, housing, and medical care. |
| Interval | It releases weekly for primary articles, fuel, and power. | It releases monthly. |
| Base year | The base year for WPI is the financial year-2011 | The base year for CPI is the calendar year- 2011-12 |
How is WPI unrelated to the CPI (likely causes of the divergence)?
There are various layers between the wholesale price and retail price:
- One is the additional cost of transportation from the wholesale to the point of sale– a rise in this cost of transportation would be translated into a higher CPI but no effect on the WPI.
- Another is the retail mark-up– if there is scarcity, the retail margin goes up, adding to the price.
- Exclusion of services- the wholesale market is only for goods, you cannot buy services on a wholesale basis.
- Differential weighing-Certain items on WPI, such as fuel, are also closely linked to international prices, creating a gap between the figures on this index and the CPI.
- Differences in the indirect taxes-WPI is the wholesale price index hence, excludes indirect taxes levied on various goods.
How is the CPI linked to the WPI?
- Input prices and cost of production- WPI includes the price of intermediate goods, if these are dearer, goes on increasing the CPI in the longer run.
- Imported inflation-WPI reflects the imported inflation- especially in the crude oil price rise which is again a basic intermediate good in various goods measured under the CPI.
- Rise in transportation cost-due to rise in crude oil prices.