A wholesale price index (WPI) is a measure and monitor of changes in the price of items before they reach the retail level. This is a term used to describe goods that are sold in large quantities and transferred between entities or businesses (instead of between consumers). The WPI, which is usually represented as a ratio or percentage, displays the average price change of the products covered; it is frequently used as one measure of a country’s level of inflation.
What is the difference between CPI and WPI inflation?
- WPI measures inflation at the production level, while CPI measures price fluctuations at the consumer level.
- Manufacturing goods receive more weight in the WPI, whereas food items have more weight in the CPI.
What is Inflation?
- Inflation is defined as an increase in the price of most everyday or common goods and services, such as food, clothing, housing, recreation, transportation, consumer staples, and so on.
- Inflation is defined as the average change in the price of a basket of goods and services over time.
- Inflation is defined as a drop in the purchasing power of a country’s currency unit.
- However, to ensure that output is supported, the economy requires a moderate amount of inflation.
- In India, inflation is largely monitored by two primary indices: the wholesale pricing index (WPI) and the retail price index (CPI), which reflect wholesale and retail price fluctuations, respectively.
CPI or WPI: which is better?
“Conceptually, the CPI is a better predictor of demand side pressures than the WPIand there is no doubting that consumer prices reflect demand side pressures better than wholesale prices,” RBI governor D Subbarao said.
According to PTI, RBI governor D Subbarao stated on Tuesday that the consumer price index (CPI) captures market dynamics better than the wholesale pricing index (WPI) in arriving at a more accurate inflation estimate.
Mr Subbarao stated at the RBI’s Mint Road office that the CPI is a better predictor of demand side pressures than the WPI. “There is no doubting that consumer prices better reflect demand side pressures than wholesale prices,” he said.
The governor went on to say that a persistent rise in wholesale costs either leads to a price hike by retailers or a strain in their margins.
However, if demand is high, retailers may use their pricing power to pass on wholesale price increases to customers. Retailers will be compelled to partially absorb the increase in wholesale pricing in their margins if demand is insufficient, he warned.
“Given the limited efficacy of monetary policy to deal with food and fuel inflation, and the limitations on using core CPI inflation measures, we have focused our attention on non-food manufactured products inflation as an indicator of demand-side pressures in the economy,” Mr Subbarao said, defending the WPI’s use in the apex bank’s inflation forecast.
He acknowledged that the criticism of the RBI’s inflation forecasts, which have been off the mark, had some merit, but pointed out that the bank has also been off the mark “For a variety of reasons, we chose WPI over CPI as a second best option. First and foremost, we do not have a single CPI that is representative of the entire country.
“Until recently, we had four, and now we have three CPIs reflecting distinct sectors of the population,” he explained, noting that although the WPI is calculated on an all-India basis, CPIs are created for individual cities and then combined to create an all-India index.
“Second, WPI is available with less of a delay than CPIs. Third, in terms of the quantity of commodities, quotations, and inclusion of non-agricultural products and tradeable things, the WPI has a greater coverage than the CPIs “he stated
He noted that the WPI has been revised upwards in recent months, sometimes sharply, and that as a result, the RBI was compelled to alter its own inflation projection several times during the previous fiscal year.
He explained that core inflation is a derived inflation measure from headline inflation “Food and fuel, which are temporary components of the headline, are not included in this procedure. Although there are various statistical methods of exclusion, this is the normal practice.”
While commodity prices do influence the non-food manufactured products component of WPI, he maintained that the pass-through from higher commodity prices to WPI is highly dependent on the economy’s underlying demand fundamentals.
“In order to analyze inflation, the RBI considers all measures of inflation, both overall and disaggregated components, as well as other economic and financial data. It is critical to have a reliable primary measure of inflation at the national level for formulating monetary policy “he stated
The compilation and dissemination of CPI (urban), CPI (rural), and CPI for the country by the CSO is a significant step forward in this direction, but long time series data, particularly for the back period, is not available for these new indices, rendering them unsuitable for policy analysis, he said.
He said that the RBI had been left to guess on inflation statistics, claiming that dramatic variations in data supply had resulted in a systematic under-prediction of inflation numbers by the RBI last year, and that measures should be made to limit the magnitude and frequency of revisions.
Mr Subbarao admitted that, in general, private inflation forecasts came much closer to what was ultimately reported for last fiscal year, blaming the sharp rise in oil and commodity prices, lower-than-expected decline in food prices despite a normal monsoon, erroneous signals from the Index of Industrial Production (IIP) data, and more than expected upward revisions to past inflation data as the factors that led to the inflation miscalculation.
Although the WPI series was revised to the base of 2004-05 last year, the existing CPIs continue to use the old base-for CPI-RL (rural laborers) (1986-87), CPI-AL (agri labourers) (1986-87), and CPI-IW (industrial workers) (2001), making them ill-equipped to capture the price behavior caused by the rapid structural changes in the economy, he said.
He noted there is a tilt in the weights towards non-food manufactured products indicating changes in the production pattern over the decade, despite the fact that the changes in the weights for manufactured products are not significant even in the updated WPI base year.
Some crucial economic statistics, such as regular retail sales data, as well as data on employment and property sales, are not frequently compiled in the country, resulting in inflation figures that are half-baked or unrepresentative of actual demand and price fluctuations.
He went on to say that the more important figures on WPI inflation had also been subject to considerable revisions “WPI inflation was estimated to be 8.2 percent in January 2011 and 8.3 percent in February 2011. Both of these figures, however, were significantly revised upwards by 120 basis points (bps) each.
“It’s not always obvious whether the modifications are the result of one-off or systemic reasons. Nonetheless, every time we have to examine the inflation scenario, we are forced to second-guess how the provisional number will be updated “Mr. Subbarao expressed his thoughts.
“However, if the provisional data we enter into the econometric model is off-track and shows no regular trend, our inflation estimates will be off-track as well,” he concluded.
Is the WPI rising?
The wholesale inflation rate is the first, and the retail inflation rate is the second. Price indices WPI and CPI are both price indexes. To put it another way, there are two distinct sets of products and services. Based on what is significant for those two sorts of consumers, the government allocates various weights to different goods and services.
In Australia, what is WPI?
The WPI examines changes in labor prices that are unaffected by changes in labor force composition, hours worked, or employee characteristics.
Who publishes WPI?
The price of a sample basket of wholesale items is represented by the Wholesale Price Index (WPI). WPI movements are used as a central gauge of inflation in some countries (such as the Philippines). India, on the other hand, has established a new CPI to assess inflation. Instead, the United States now publishes a producer price index.
It also has an impact on the stock and fixed-price markets. The Economic Adviser at the Ministry of Commerce and Industry publishes the WPI. The Wholesale Price Index measures the price of goods sold between businesses rather than the price of goods purchased by consumers, as the Consumer Price Index does. The WPI’s goal is to track pricing changes in industry, manufacturing, and construction that reflect supply and demand. This aids in the analysis of both macroeconomic and microeconomic circumstances.
Is WPI or CPI used in India?
According to the Indian Ministry of Statistics and Programme Implementation, India’s inflation rate was 5.5 percent in May 2019. This is a little decrease from the previous annual result of 9.6 percent in June 2011. For all commodities, inflation rates in India are commonly expressed as changes in the Wholesale Price Index (WPI).
The consumer price index (CPI) is widely used as the primary indicator of inflation in many developing countries. The CPI (combined) has been named the new standard for calculating inflation in India (April 2014). CPI data is normally collected monthly and with a large lag, making it inappropriate for policymaking. Changes in the CPI are used to calculate India’s inflation rate.
The WPI is a price index that calculates the cost of a typical basket of wholesale items. Primary Articles (22.62 percent of total weight), Fuel and Power (13.15 percent), and Manufactured Products (13.15 percent) make up this basket in India (64.23 percent ). The weight of food articles from the Primary Articles Group is 15.26% of the overall weight. Food products (19.12 percent); chemicals and chemical products (12 percent); basic metals, alloys, and metal products (10.8 percent); machinery and machine tools (8.9 percent); textiles (7.3 percent); and transportation, equipment, and parts (7.3 percent) are the most important components of the Manufactured Products Group (5.2 percent ).
The Ministry of Commerce and Industry measured WPI data on a weekly basis.
As a result, it is more up-to-date than the trailing and rare CPI figure. Since 2009, however, it has been measured monthly rather than weekly.
In India, what is CPI inflation?
The CPI tracks retail prices at a specific level for a specific product, as well as price movement in rural, urban, and all-India areas. CPI-based inflation, often known as retail inflation, is the change in the price index over time.
Why is the CPI always higher than the WPI?
Inflation, or the pace at which prices rise, is essentially a silent tax that reduces people’s purchasing power. As a result, it is the most politically sensitive of all economic indices.
Indeed, the government should be concerned about the most current indicator of inflation, the wholesale price index (WPI). It stood at 14.2 percent in November. This means that wholesale prices increased by 14.2 percent from November 2020 to November 2021.
This is the greatest monthly inflation since the commencement of the current WPI series in April 2012. Data from April 1983 is available in the spliced WPI series released by the Centre for Monitoring Indian Economy. According to this data, wholesale inflation reached 13.8 percent in November, the highest level since April 1992. As a result, WPI inflation hit a nearly three-decade high last month.
Wholesale inflation has been driven up by the high prices of many types of energy and minerals. Take, for example, iron ore, which is a key component in the production of steel. Its price increased by 56.4 percent in November. Mineral prices increased by 20.9 percent overall. Petrol prices increased by 85.4 percent, diesel by 86.1 percent, and LPG by 65.2 percent.
The increase in fuel and mineral prices has seenp into the growth in the price of manufactured goods, which has through an 11.9 percent increase. Politically, though, such a high wholesale inflation rate hasn’t rung the warning bells as loudly as it might. What is the reason for this?
In November, inflation was 4.9 percent, as measured by the consumer price index (CPI) or retail inflation. This massive disparity between wholesale and retail inflation has remained for the majority of this fiscal year. WPI has been over 10% since April, although CPI has been significantly lower. Wholesale inflation was 12.2 percent between April and November, while retail inflation was 5.2 percent.
Why aren’t greater wholesale costs trickling down to retail? The fact that food has a substantially higher weighting in the CPI than in the WPI is one simple reason for this. Food costs have risen at a slower rate this year than they did last year. Food costs increased by 1.9 percent in November. The difference between wholesale and retail inflation is explained by the gradual rise in food prices.
Nonetheless, there is a consequence to this. The base effect is also at work, which explains why food prices grew at such a rapid pace last year. As a result, food costs were already very high, and we’ve seen another price increase.
Food inflation was 9.9% between April and November of 2020. Because of the base effect, it was 2.8 percent this year. Because food inflation was 3.4 percent in December, this base effect will disappear starting next month.
In the case of veggies, there is another point that has to be made. In November, vegetable prices declined by 13.6 percent when compared to November 2020. Many people may conclude that government data collectors are not visiting the same markets as the general public.
But it’s back to the fundamental effect at work. In November 2020, vegetable costs had climbed by 15.5 percent. Intriguingly, when comparing month-over-month vegetable costs, October saw a 14.2 percent increase in comparison to September and a 7.5 percent increase in comparison to October. This explains the recent price increase in vegetables.
There’s another reason why greater wholesale pricing aren’t being passed on to consumers. Companies resisted passing on pricing hikes to their customers because of the pandemic lockdown’s destruction of consumer demand. However, as demand has increased, this has begun to change. Companies that sell fast-moving consumer items have begun to hike prices or reduce product box sizes. This will soon be reflected in the retail inflation rate.
In addition, telecom providers have raised costs by 20-25 percent, primarily for prepaid contracts. Furthermore, as the economy continues to open up, service inflation will continue to climb. Consider the inflation of recreation and amusement. Inflation in the last three months has reached its highest level since the current CPI series began in 2012. This is a clear indication that the well-to-do are venturing out of their houses, driving up rates for everything from hotel rooms to movie tickets.
High salary inflation will bleed into retail inflation in a place like Bengaluru, thanks to the presence of IT businesses and numerous unicorns, harming individuals who aren’t seeing their earnings grow at the same rate as those working in such companies.
On top of that, there’s the worry of Omicron, the new Covid viral subtype. There will be demand destruction if Covid spreads again as a result of the new variety, but there will also be supply chain disruptions, which will flow into retail inflation. Overall, we can be confident that retail inflation will rise in 2022. If it hasn’t done so already, it will become a political issue.
(Unlike his upright forefathers, Vivek Kaul lives to read mystery fiction and makes a job writing about economics.)
Why did India convert from WPI to CPI?
The RBI’s present aim of headline CPI inflation would be improved by a mix of core wholesale price index (WPI) and core CPI inflation. This would help to strike a balance between producers’ and customers’ interests. This inflation indicator has a low standard deviation as well as a low mean inflation rate.