Q.1 How are CPI and WPI measured in India?
Mention the basic broad
categories of items included in each and the weightage assigned to these.
CPI: Consumer Price Index is the metric used to measure retail inflation. It is used to
measure the changes in price of a fixed basket of goods and services consumed by
households over a period of time. Retail Inflation is the annual percentage change in
the CPI.
CPI is expressed as a percentage of the price of the basket with respect to a base
year. Current base year is 2012. CPI for base year is fixed at 100 and subsequent
change in price of the basket is calculated.
In our country CPI is calculated by taking a basket of 299 goods and services. These
goods and services can be categorised in different categories. Different categories in
CPI with their respective weightages are:
WPI: WPI is a metric that monitors the change in prices of wholesale goods. It
measures the average change in prices of a fixed basket of commodities over a
period of time. There are total of 697 items in the WPI basket which are segregated
in 3 major groups of goods, they are -
Primary Articles: It accounts for 20.19% of the total basket. It is further divided
into Food articles and non-food articles.
Fuel and Power: It accounts for 14.91% of the total basket. It tracks
movement in prices of Petrol, Diesel and LPG.
Manufactured products: It accounts for 64.9% of the total weightage of the
basket. This is the biggest group consisting of various manufactured
products.
CPI and WPI data is released every month by the CSO - Central Statistics Office
Q.2 After observing the baskets, comment on whether we (in India) should be
using Core Inflation or Headline inflation to assess the impact of sustained
price change in the economy. Explain.
Headline inflation measures the change in prices of all the components in the basket.
While core inflation excludes some of the components from the calculation of
CPI/WPI.
Generally the components excluded are the ones which have high price volatility like
food and fuel. The rationale behind excluding such components is to reduce the
noise in computation of inflation.
In a developing country like India where there is a high consumption of fuel and food
components, it is important to use Headline inflation to monitor the changes in prices
of these components. Fuel and food are the essential components and lower-income
groups spend the majority of their income on these. Hence to make monetary
policies to stabilise the prices of these components Headline inflation should be used
by India.
But with high volatility of fuel and food prices it becomes essential to measure the
core inflation as it reflects the underlying inflation trend. When there are supply
shocks in fuel and food, Core inflation should be used as it is a good measure to
achieve low and stable inflation.
Q.3 Map the CPI and WPI data over the last two years, using monthly data. If
you cannot get monthly data, quarterly data is fine too. State two likely
reasons for the latest divergence in these two series (with references). State
two implications of this gap.
Likely reasons for increase in divergence between CPI and WPI:
1. Difference in basket composition & weightages of different components: The
baskets used for calculating WPI and CPI indices vary a lot. Also, the
weightage given to similar components vary a lot. For example food accounts
for around 50% of the CPI basket while it accounts for only around 25% of the
WPI basket. Services are not included in the WPI basket while they are
included in the CPI basket which again can be the source of divergence.
2. WPI basket mostly contains primary and intermediate goods, but CPI consists
of finished products in higher proportion. The higher divergence could be
because of the consumption still being low because of the Covid-19 pandemic
and production going back to pre-pandemic levels.
3. Increase in prices of metals, crude oil, petroleum, natural gas, chemical
products, food products etc compared to last year has resulted in significant
rise in Wholesale Price Index.
Implications of rising divergence between WPI and CPI:
1. The growing gap between WPI and CPI can impact the monetary policy
decision making which was focusing mainly on controlling CPI inflation. This
would make the process more complex given that WPI and CPI have a
cascading effect on other macroeconomic variables.
2. Since the input prices of goods are increasing producers and manufacturers
will pass on the rise in prices to the end consumers. This will lead to an
increase in prices of goods. Also considering the higher prices of input goods,
the investments in manufacturing and production sector might decrease as
manufacturers might think it will lead to lower profit levels.
References:
WPI, CPI data
https://eaindustry.nic.in/
https://tradingeconomics.com/india/consumer-price-index-cpi
https://www.bloombergquint.com/business/mixed-messages-why-wholesale-and-
retail-inflation-are-diverging
https://edukemy.com/current-affairs/gazette/2021-11-25/wpi-cpi-divergence
