All you need to know about WPI and CPI inflation

The wholesale price index (WPI) based inflation in May hit an all-time high of 12.94% in May, compelling many analysts to gauge it’s impact on already sluggish demand amid the Covid-19 pandemic. But even with all the buzz around this figure, do you know how inflation is tracked and calculated ? Have acronyms like the WPI and CPI always perplexed you ? Here’s a quick explainer to know what they are and why are they important.

What is CPI ?

Consumer Price Index (CPI) is a price index that represents the average price of a basket of goods over time. CPI calculates the average price paid by the consumer to the shopkeepers.

As an economic indicator, it not only calculates the price levels for consumer goods but is also a reflection of government policies that are responsible for changing price levels.

CPI-based inflation also known as retail inflation gives governments and RBI a fair idea about changing prices in an economy. CPI also tells about the changing purchasing power of consumers.

CPI data is published by the National Statistical Office around the middle of every month for the preceding month.

What Is WPI ?

Wholesale Price Index (WPI) is an indicator of price changes in the wholesale market. WPI measures the changes in commodity price at selected stages before goods reach the retail level.

Analysts use the numbers to track the supply and demand dynamics in industry, manufacturing and construction. The numbers are released by the Economic Advisor in the Ministry of Commerce and Industry.

An upward surge in the WPI print indicates inflationary pressure in the economy and vice versa. The quantum of rise in the WPI month-after-month is used to measure the level of wholesale inflation in the economy.

What is the difference between WPI and CPI inflation?

While WPI keeps track of the wholesale price of goods, the CPI measures the average price that households pay for a basket of different goods and services.

Even as the WPI is used as a key measure of inflation in some economies, the RBI no longer uses it for policy purposes, including setting repo rates. The central bank currently uses CPI or retail inflation as a key measure of inflation to set the monetary and credit policy.

There are two layers between the wholesale price and retail price, one is the additional cost of transportation from the wholesale to the point of sale, and the other is the retail mark-up.

Another difference between the two indices is that the wholesale market is only for goods, you cannot buy services on a wholesale basis. So WPI does not include services, whereas the retail price index does.

What causes inflation?

Inflation can be described as the general rise in the price of goods and services in an economy over time.

An increase in price levels can be due to supply-side uncertainties or due to higher demand. Higher demand born out of the improving purchasing power of consumers signals economic growth in the future, while a higher energy price led inflation might have an adverse effect on the economy. A drought for instance will impact supply and will lead to higher prices. On the other hand, lower demand for goods (in today’s case due to pandemic, negative sentiments, lockdowns) will lower prices.

For instance, if everyone suddenly wants sanitisers, the price of hand sanitisers will go up. This is because it takes time to produce these goods in line with this new higher demand.

At other times, when the cost of producing these goods and services because of factors such as higher energy prices etc., the supplier passes on the burden to the consumer.

The cause of changes in the general price level is essential to understanding the mechanism of the economy.

The net effect of inflation is that the value of your money can decrease over time and this is why most financial experts urge people to invest in assets which can give you inflation beating returns giving you a secure financial future.