What is WPI and how is it different from CPI?

The Wholesale Price Index (WPI) jumped by 7.39% in March on a year-on-year basis, generating apprehension among experts. This rate was the highest October 2012.

Though the policy makers are guided by Consumer Price Index-based inflation, it is likely the WPI will come into focus in the next few months if upward inflationary pressures come into play.

What is WPI?

Wholesale Price Index (WPI) is one of the key indicators of rise/fall in prices in the market, and therefore, is a measure of inflation. It measures the average change in prices of commodities in the country at the factory gate stage, that of agricultural produce at the mandi stage and price levels of minerals at the mine stage.

Data on WPI is released every Thursday.

How is WPI different from CPI?

The Wholesale Price Index tracks the prices of goods at the wholesale level or gate of the factory.

The Consumer Price Index tracks prices at the retail level, which are the prices that consumers pay.

Obviously the first price does not contain taxes at the retail level, dealer margin and the transportation cost.

How does inflation affect investment?

There is a definite and extremely significant relation between inflation and investment. The real returns on an investment is actually measured by the amount of wealth it is making after adjusting for inflation, since inflation gives one an estimate of the erosion of the purchasing power of money.

Whenever one makes an investment decision, one of the cornerstones is to understand by how much are the returns beating the average inflation for the period of investment.

If an instrument where you have invested gives an annual returns of 5%, while the average inflation for the period is more than 5%, the value of the money you make on maturity actually goes below the face value.

For the Reserve Bank of India, inflation has paramount significance since the bank is guided by the rise/fall in inflation to determine how much money to release into the system and therefore, determine interest rates in the country, which in turn, affects returns on savings instruments.

What are the compositions of WPI and CPI?

WPI tracks the prices of goods that are produced in factories and not services.

CPI tracks the price of services too and therefore, is more broad based.

Moreover, CPI tracks the price of foodstuff and has a weightage of more than 48% that demonstrates the importance of food items in this basket.

Why is the rise in WPI relevant?

Though WPI and CPI are not the same, if prices of goods rise now, it will reflect in the CPI in the near future.

CPI-based inflation is already on the rise. In March it reached 5.52% which is a four-month high.

Since the WPI also rose to an almost 9-year high, one can perhaps detect a ‘convergence’ of the two. Moreover, the high prices at the wholesale level can easily rollover to the retail level if the next few months.

It means common man can feel the pinch in the coming months due to the rise of price of goods and commodities.

What are the goods and commodities that are tracked by WPI?

The items tracked by WPI are the following. Figures in brackets indicate the weightage of each:

Food articles (18.80%)

Crude petroleum and natural gas (2.97%)

Coal (2.63%)

Mineral Oils (9.8%)

Electricity (3.70%)

Food Products (11.24%)

Textiles (6.02%)

Chemicals and chemical products (7.96%)

Basic Metals (11.88%)

Non-metallic mineral products (3.94%)

Fabricated metal products except machinery/equipment (3.88%)

Machinery & equipment (5.89%)

Motor vehicles, trailers (6.11%)

Non food articles (5.18%)

How is CPI calculated?

CPI is calculated in the following way:

(Cost of a fixed basket of good and services in the current period (say a month)/the cost of the same basket of goods and services in the base month) MULTIPLED by 100

It is to be noted that the value of the CPI is dependent on the denominator. If the denominator is small ie, if the cost of the basket of goods and services was low in the base period, the value will be higher and if the cost in the base year was higher, the value will be lower. So, it does not depend only on the numerator, or the cost in the current period.

How does the government collect data to calculate CPI

The data on prices is collected by employees of the National Statistics Office from 1,181 villages and 1,114 cities/towns in the country. The year 2012 is taken as the base year.

Is the CPI the same for all categories of people

CPI is extremely useful in calculating wages, salaries, pensions and returns on investment. Over time CPI also indicates how the value of the currency has eroded.

Four types of CPIs, appropriate for different categories of people, are released by the government. These are: CPI for industrial workers, CPI for agricultural labourers, CPI for rural labourers and CPI for urban non-manual employees.