India has two broad ways in which it measures inflation, you would think that even though that there are two ways to measure inflation, these would have more or less very high correlation  but that’s not the case. What we find out is that CPI which is  consumer price index and WPI which is wholesale price index have often in the past been at divergence. For example, the January data for WPI comes at 4.73 % which is lowest since January 2021. In two years, it comes the lowest but at same time the CPI comes at 6.5 % which is higher than 6% limit that RBI has put, so why is that in theory both are measuring the same thing, then why there is such a discrepancy?

WPI Chart

CPI Chart

First, why do we even have two measures of inflation?

So there are various measures for inflation, bit broadly we have the CPI which measures the inflation at the retail level, which is what we are paying for goods. WPI measures at the first point of bulk sale. There is also GDP deflator, ratio of GDP at current price to GDP at prices of some base year.

We focus on CPI and WPI only because they come on monthly frequency unlike GD figures.

What is composition of CPI & WPI?

CPI as we know, it measures at retail level. So, how to we figure what goes it in the CPI . The weight of various commodities are different that WPI .In CPI the weights comes from National statistical office , they do the consumer expenditure survey every 5 years, The consumers are asked questions related consuming habits  across the country, based on that weights are determined for CPI basket .

There are interstate variation, because there are differences in the consumption pattern. A rural household consumption pattern will be not same as urban  , so that is why the weights in the rural CPI are different from weights in the urban CPI , In rural CPI the weight for food will be more than urban , because rural household spend more of their money on food than urban people do.

In WPI, the weights comes from the production value . The production value is net imported value of the commodity. So, it basically production value in WPI in CPI it’s a consumption level.

There are lot of things which are captured in CPI but not in WPI. For example in Services  in health , CPI captures health expenses but not In WPI . WPI only includes inputs, or manufactured goods.

Almost 64% weight in manufactured products consists of  chemicals, textile and other commodities, Because  now, due to  the trade liberation, WPI captures our tradable commodities.

Whenever there are global issues we look at WPI, because it contains tradable good, whereas CPI not tradable covers non-tradable like food and services.

That’s why we have two measures for inflation, one captures global headwinds ( WPI ) , then CPI may get impacted depending on government  responses.

For example, in Russian war the sunflower and palm oil prices kept on rising, so the government reduced the import duties on sunflower oil , which had impact on CPI .

Crude oil prices, for instance, when they go up or down, the first impact will have on WPI , the government can impact or reduce the impact using the taxing system.

So, there can be or can’t be a lag between the WPI and CPI. In last 10 years we have seen that there have periods when WPI and CPI figures have diverged widely. The recent the recent times during covid the WPI was in deflation, but the CPI was 5% up. CPI was high because of local supply bottlenecks and WPI was down because the global prediction was next to zero. There is correlation of .8 between global crude oil prices and the WPI by the way.

Correlation of WPI and Crude oil Prices

what decides the weightage?

The WPI weight are decided based on net traded value, The base year used is 2012, there were talks of changing the base year but the so far the next survey hasn’t happened yet.

Net traded value = Production – Imports, the higher the value the higher the weightage of the commodity.

So, what do we produce so much, that they end up in WPI?

These are normally the goods, that we are exporting a lot, like 64% will have food products like bakery etc., industrial chemicals like paints, API, formulations etc.

There are three broad categories like fuel & power, Manufactured products, and primary articles.

IN CPI, there are 6 categories like food & beverages, Clothing, housing, footwear and miscellaneous. 

Who measures WPI and CPI?

WPI is measured by ministry of commerce, and CPI is measured by ministry of statistics.

Are the measurement procedures different in WPI and CPI?

In CPI, we are talking about urban and rural markets. So CPI, is index which is product of fixed weight and prices, based on consumption baskets. There are around 11,00 markets in rural and urban areas from which prices are taken for various categories.

In WPI, it Is the value of production, in CPI, people check the prices at the shops.

In CPI data needs to be collected from shopkeepers, in WPI the data comes to you from the ministry directly.

So, as we can see we need two measures of inflation in the country because there are factors like global headwinds which impact the prices and there are government initiatives like taxes and local supply chain bottlenecks or trade barriers etc. which impact prices for consumers.

Written By: Ankur Kushwaha, Sr. Consultant, Invest Punjab | Govt. of Punjab.

DISCLAIMER: Views expressed are personal.