- January 29, 2022
- Posted by: OptimizeIAS Team
- Category: DPN Topics
Subject – Economy
Context – For monetary policy, tasked with curbing inflation that is on the high side amidst uncertain growth, these are difficult times indeed
Wholesale Price Index (WPI)
- Wholesale Price Index (WPI), had earlier been the inflation anchor for monetary policy.
- It has a bigger commodity basket and derives its weights from national accounts based on traded value of commodities.
- WPI is an exclusive commodity price index, and excludes services.
- Since the weights in WPI are based on traded value, it assigns much higher weights to manufactured products relative to their share in GDP as the ratio of value added to output in manufacturing is nearly four times the ratio of value added to output in agriculture.
- It captures prices at first point of sale.
- From the perspective of producers and their investment decisions, WPI inflation is the real anchor and hence equally important from policy perspective.
- Further, since it represents inflation for producers and serves as the first point of changes in prices, it captures impact of international commodity prices.
CPI (Consumer Price Index)
- CPI (Consumer Price Index) draws commodity weights from NSSO consumption survey.
WPI and CPI correlation
- WPI and CPI inflation hardly have any correlation, though WPI food has a reasonable correlation with CPI food, largely because the commodity composition is nearly aligned.
- Low correlation between overall WPI and CPI inflation is largely because half the weights in WPI comprising basic goods, capital goods, and intermediate hardly figure in CPI.
- High correlation between WPI and CPI for food and WPI being the sole indicator of price movements of basic, intermediate, and capital goods, it is helpful in deciding structural intervention in trade and fiscal policies.
- WPI inflation has been more volatile than CPI.
- Until 2020-21, WPI inflation was lower than CPI across all segments other than food.
- Lower producer inflation relative to the price rise for consumers indicates generally increased profitability for producers and increased margins for final retailers.
- Another notable factor is that inflation in capital goods has remained moderate and relatively stable during these years even though there has been volatility in inflation of basic goods and intermediates. The capital goods industry has maintained prices adjusting their margins.
- The structure of inflation based on both WPI and CPI suggest that monetary policy alone is not sufficient to maintain price stability. While monetary policy should act irrespective of what triggers inflation, supply shocks should be handled through fiscal route.