Inflation measures WPI/CPI

Measures of Inflation-

1. Wholesale Price index
2. Consumer Price index
3. GDP Deflator

An index figure reflects the change in a set of associated variables over a time period and in a particular direction. Thus, price index is reflective of the total change in price level paid by a producer or consumer.
In the Indian context, 5 national indices are accounted for inflation measure that include WPI and other four CPI indices.

Wholesale Price index

• WPI index reflects average price changes of goods that are bought and sold in the wholesale market.
• WPI in India is published by the Office of Economic Adviser, Ministry of Commerce and Industry.
• Further, the data for WPI is monitored and updated on a weekly basis taking into account all the 676 items that form the index.
• The various commodities taken into consideration for computing the WPI can be categorized into primary article, fuel and power, and manufactured goods.
• Primary articles included for the computation of WPI include food articles, non-food articles and minerals.
• In the fuel, power, light and lubricants, electricity, coal mining and mineral oil are included.
• The manufactured goods category encompasses food products; beverages, tobacco,and tobacco products; wood and wood products, textiles; paper and paper products; basic metals and alloys; rubber and rubber products and many others.
• The whole sale price index (WPI) does not includes the cost of services.
• As WPI accounts for changes in general price level of goods at wholesale level, it fails to communicate actual burden borne by the end consumer.

Consumer Price index

• CPI is computed by executing a weighted average on a particular set of goods and services.
• The computation of CPI takes into account price changes and the actual inflation that affects the end consumer.
• CPI is thus a reflection of changes in the retail prices of specified goods and services over a time period which are traded by particular consumer group.
• While earlier the Reserve Bank of India used WPI inflation to manage monetary policy expectations, it is now the CPI inflation which is largely taken into account.
• The RBI highlights its inflation expectations based on the CPI inflation data that comes in.

Wholesale Price Index (WPI) represents the price of goods at a wholesale stage i.e. goods that are sold in bulk and traded between organizations instead of consumers. WPI is used as a measure of inflation in some economies.
WPI is an easy and convenient method to calculate inflation. Inflation rate is the difference between WPI calculated at the beginning and the end of a year. The percentage increase in WPI over a year gives the rate of inflation for that year.

Consumer Price Index (CPI) is a measure of change in retail prices of goods and services consumed by defined population group in a given area with reference to a base year. This basket of goods and services represents the level of living or the utility derived by the consumers at given levels of their income, prices and tastes. The consumer price index number measures changes only in one of the factors; prices. This index is an important economic indicator and is widely considered as a barometer of inflation, a tool for monitoring price stability and as a deflator in national accounts. Consumer price index is used as a measure of inflation in around 157 countries. The dearness allowance of Government employees and wage contracts between labour and employer is based on this index.

Consumer Price Indices (CPI) released at national level are:

1. CPI for Industrial Workers (IW)
2. CPI for Agricultural Labourers (AL)/ Rural Labourers (RL)
3. CPI (Rural/Urban/Combined)

While the first two are compiled and released by the Labour Bureau in the Ministry of Labour and Employment, the third by the Central Statistics Office (CSO) in the Ministry of Statistics and Programme Implementation. In India, RBI uses CPI(combined) released by CSO for inflation purpose.

Differences between WPI & CPI

1. Primary use of WPI is to have inflationary trend in the economy as a whole. However, CPI is used for adjusting income and expenditure streams for changes in the cost of living.
2. WPI is based on wholesale prices for primary articles, administered prices for fuel items and ex-factory prices for manufactured products. On the other hand, CPI is based on retail prices, which include all distribution costs and taxes.
3. Prices for WPI are collected on voluntary basis while price data for CPI are collected by investigators by visiting markets.
4. CPI covers only consumer goods and consumer services while WPI covers all goods including intermediate goods transacted in the economy.
5. WPI weights primarily based on national accounts and enterprise survey data and CPI weights are derived from consumer expenditure survey data.

GDP Deflator

• The most comprehensive measure is GDP deflator which is measured as ratio of GDP (Gross Domestic Product) at current prices to GDP at constant prices.
• Since it encompasses the entire spectrum of economic activities including services, the scope and coverage of national income deflator is wider than any other measure.
• This data is released by the Central Statistical Organisation (CSO) but is not used as it comes quarterly and with a 2 month lag.

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