Why there is a stark difference between WPI and CPI inflation?

There is sharp contrast between the Wholesale Price Index (WPI)-based inflation data and Consumer Price Index (CPI)-based inflation data as published by the government.  The Ministry of Commerce & Industry said on Tuesday that wholesale inflation in April 2024 increased for the second month in a row to 13-month-high of 1.26 per cent. While, a day before on Monday, May 13, 2024, the CPI-based inflation reading fell for the fourth straight month in April 2024 to 11-month high of 4.83 per cent. This signifies that wholesale inflation has increased in the last 13 months. While, retail inflation has decreased in the last 11 months. But, how is this possible? Inflation trajectory of goods and services on retail and wholesale scale  are moving conversely! Is this normal and does this happen all the time or is it that the state of economic affairs of the country is currently in an unusual phase?

Well, the answer is that this is completely normal. And this can happen at any given time in any economy. According to credit rating agency, ICRA, chief economist, Aditi Nayar, ” It is fairly common for the WPI and CPI to be at very different levels and move at different directions at the same time.”

Now we will know the reason behind WPI and CPI divergence!

Well, the answer lies in the difference in the composition of both these  indices. The goods and services which make up retail inflation basket don’t necessarily make up the wholesale inflation basket. In fact, there is sharp contrast in composition of these  two indices. For example, CPI-based inflation basket is composed of mostly food items and services. While, that of WPI-based inflation is composed of commodities.

According to Nayar,  “Almost a quarter of the CPI is made up of services that won’t find any place in the WPI at all.” As separate items are used in the computation of both these indices. So, the inflation data computed on the basis of both these indices will naturally be different.