Explained WPI and CPI: Measures of Inflation

The two main indicators of inflation in India are the wholesale price index (WPI) and the consumer price index (CPI). The WPI measures prices received by producers of goods, while the CPI measures prices facing consumers at the retail level.

The WPI is calculated using the Laspeyres formula, which measures the change in the cost of purchasing the same basket of items in the current period as was purchased in a specified earlier period. This technique is simpler than other methods since the weights are computed in the base period and, until this is updated, each subsequent calculation requires only an update of prices.

The wholesale price index comprises as far as possible all transactions at the first point of bulk sale in the domestic market. Provisional monthly WPI for All Commodities is released on the 14th of every month (the next working day, if the 14th is a holiday). The prices used are ‘wholesale prices for primary articles, administered prices for fuel items and ex-factory prices for manufactured products’. That is, the WPI measures the prices of products at the factory or farm gate, prior to their sale to consumers in retail markets. One advantage of the WPI is that it has a long history, dating back to January 1942, which makes it useful for assessing long-term trends in inflation. The WPI also covers a broad range of goods, from raw materials to finished manufactures, but notably excludes services.

 The weights for components of the WPI are derived from their share of gross output in current price terms. The WPI has only been rebased four times in its history.

The new series of Wholesale Price Index(WPI) with base 2011-12 is effective from April 2017. Data for WPI(2011-12) has however been provided from April 2012 to March 2017 for research and analysis only. The linking factor given for the conversion of WPI(2011-12) indices to WPI(2004-05) series should be used from April 2017 onwards.

WPI captures the average movement of wholesale prices of goods and is primarily used as a GDP deflator. WPI (2011-12) reckons only basic prices and does not include taxes, rebate/trade discounts, transport, and other charges. Website Content is Managed by the Office of the Economic Adviser, Department for Promotion of Industry and Internal Trade (DPIIT), and the Ministry of Commerce and Industry (MoCI).

 Although the WPI has traditionally been the most widely used measure for assessing inflationary pressures, the Reserve Bank of India (RBI) conducted a review of its monetary policy framework, which recommended adopting a flexible inflation targeting regime, based on headline CPI inflation. This article outlines the two main price measures available for the Indian economy and discusses their role in India’s monetary policy.

Consumer Price Index (CPI):

Consumer Price Indices (CPI) measure retail inflation by collecting data on the prices of goods and services in a selected basket of goods and services over a select period.

Consumer Price Index (CPI) is designed to measure the changes over time in the level of retail prices of a fixed set of goods and services consumed by an average family of a defined population group in a given area concerning base year. It does not measure the costliness of a place as the same involves quantity as well as price but in the Consumer Price Index only price changes are reflected and not quantity changes. However, this aspect could be taken care of to some extent, by revising the base year of the index at short intervals, so that the relative importance of items in the family budget of the given population based on the latest consumption pattern is reflected in the index.

Normally, an arithmetic method that involves the ratio of the old series indices to the new series indices for the base period is utilised for working out the linking or conversion factor of the two series. However, the ratio method which involves the average of the ratio of monthly indices of the two series for the base period has also been tried in the past and it gives similar results as the arithmetic method. A period longer than the base period or later than the base period is normally not preferred because it can affect continuity of two series. However, at times due to administrative and operational difficulties, the release of the new series is inordinately delayed and in the meantime the old series is continued. In such cases, two series are linked using the ratio of averages of indices for the 12 months proceeding the month of the introduction of the new series. This latter approach was followed for linking the 1982 series with the 2001 series which was introduced with the January 2006 index. Generally, the two series are linked as such, i.e., without any revision of the old series due to methodological improvements in the new series. It may be added here that two series cannot be expected to show similar trends because of differences in coverage, methodology, changes in consumption patterns over time, etc. For example, the old series of CPI (IW) for 1960=100 was replaced by a new series with base 1982=100 with effect from October 1988. This was further updated in 2001, 2012, and 2016. The new series of Consumer Price Index for Industrial Workers (CPI- IW) on base 2016 =100 has been effective from September 2020. These indices measure the relative changes in retail prices of a fixed basket of goods and services consumed by industrial workers over some time. The Consumer Price Index Numbers for Industrial Workers are utilized for the regulation of wages & dearness allowance for millions of workers & employees in the country. These indices are also used for measuring inflation and other policy formulations. As an integral part, the Labour Bureau conducts Repeat House Rent Surveys at 88 centers across the country to collect House Rent data from sampled dwellings regularly for the compilation of the Housing Index in respect of these centers in each round of six months i.e., January to June and July to December.

In India, Consumer Price Indices are compiled for five different segments of the population namely industrial workers, agricultural labourers, rural labourers, urban population, and rural population. The first three indices are being compiled by Labour Bureau, Shimla, and the last one by the Central Statistical Organisation based in New Delhi. The Consumer Price Index Numbers for Industrial Workers (CPI-IW) are being compiled for the industrial workers employed in Factories, Banks, Mines, Plantations, Railways, Public Motor transport undertakings, Electricity generation and distribution establishments, ports, docks, etc. changes over time in the general level of prices of goods and services that households acquire for consumption. CPI is widely used as a macroeconomic indicator of inflation, as a tool by governments and central banks for inflation targeting and monitoring price stability, and as a deflator in the national accounts. CPI is also used for indexing dearness allowance to employees for price increases.

Two government agencies publish several consumer price indices, namely the Ministry of Statistics and Programme Implementation (MOSPI) and the Ministry of Labour and Employment. Each index has its own set of weights and the base period used varies across measures. There are also methodological differences between the indices, such as how prices are collected.

Sources: Ministry of Labour and Employment; Ministry of Statistics and Programme Implementation