Finance News: WPI or CPI, which is better measure of Inflation

WPI (Wholesale Price Index)

WPI is considered as the headline inflation indicator of India. It is defined as the average increase in price of basket of 676 items. It is used by government, banks, and industry and business circles for their decision making. Also, important monetary and fiscal policy changes are linked to WPI movements. At present it is measured with 2004-05 as the base year which earlier was 1993-94.

Working group for the revision of base year was formed on December 26, 2003 under the Chairmanship of Abhijeet Sen, Member, Planning Commission. As per the working committee, base year chosen should be a normal year and for which reliable price and other data are available. This committee proposed 2004-05 as the new base year. The Weightage assigned to various commodities that forms WPI is given below

Weight of Different commodities in WPI

Some countries that use WPI are India, Japan, Greece, Norway and Turkey

CPI (Consumer Price Index)

CPI is defined as the change in price level of basket of goods and services as purchased by households/retail buyers. It is the index for common people because it properly captures the effect of rising prices with respect to common man.

CPI at present is compiled separately for

Entire Urban Population
Entire Rural Population
Consolidated CPI for Urban and Rural – Computed based on the above two CPI’s

Earlier CPI was calculated with four different categories. Base year has been changed to 2010. Total number of elementary items considered is 200.

According to the Ex-Governor D Subbarao, “Conceptually, the CPI is a better indicator of demand side pressures than the WPI... and there is no denying that consumer prices better reflect demand side pressures than wholesale prices”.

In case of weak demand from consumers, retailers will be forced to partly absorb the wholesale price increase and therefore wholesale price increase is passed to customers only when there is strong demand for the goods and services.

Three major reasons why central government uses WPI over CPI

In the same article, honourable D Subbarao cited the reasons for using WPI over CPI. They are : -

WPI is computed on an all India basis, while CPI are constructed for specific centers and aggregated to an all-India index.
WPI is available with a shorter lag than CPI
WPI has a broader coverage (676 items) as compare to CPI (200 items)

Producer Price Index:

It measures the average change in selling price of goods and services with reference to the Producer. The prices included in PPI are from the first commercial transaction for many products and services. Most of the OECD countries uses PPI as a measure of inflation.