What is WPI Inflation and How is it Good for Economy?

Updated November 10, 2022

The wholesale inflation in 8 months standing at high at 1.48 percent in October, as manufactured products turned costlier. Manufactured products inflation rose 2.12 percent compared to an increase of 1.61 percent in September, according to data released on Monday. Wholesale/WPI inflation is an increase in the average price level of baskets of wholesale goods.

What is Inflation?

A general and sustained increase in the price level of goods and services refers to inflation. If it shoots up very high then it would be considered hyperinflation or something else. An increase in the price of particular goods or services doesn’t show the inflation in the price index. It is calculated on the increase of an average price level of a basket of selected goods and services over time. A basket includes goods and services like food, clothing, housing recreation, consumer staples, transportation, etc.

The Prime indices for measuring inflation in India are the Wholesale Price index (WPI) and Consumer Price Index (CPI). The first one measures wholesale price changes and retail level price changes are measured by the later one. The CPI calculates the difference in the price of goods and services of its representative basket. And on other hand, the goods sold by the manufacturer to the wholesaler for selling further are captured by WPI.

The inflation rate is very crucial for making economic policies like monetary and fiscal policy. Because a session of Monetary Policy Commission is held by RBI after every two months, where they set a target of keeping the CPI inflation between 2 to 6 percent.

Wholesale Price Index (WPI)

WPI is a price changing indicator of a representative basket of wholesale goods. It calculates the difference in the price of goods sold by manufacturers to wholesalers for selling further. WPI products is categorized into three broad sectors that are manufactured products, food particles, and fuel and power. Every sector has given different weightage like, food and article (22.62%), fuel and power (13.15%), and Manufactured products has given the most weightage that is 64.23%.

WPI is released by the office economics advisor (ministry of commerce & industry). It measures the price changes of goods only and the base year adopted for measuring WPI is 2011-2012. 697 items are covered under WPI baskets.

Consumers Price Index (CPI)

CPI is a price index that represents the average price of baskets of goods and services overtime. It measures the retail price changes of goods and services like food, transportation, medical care, clothing, housing recreation, etc. The categorization of CPI products is quite sharper. It includes food and beverage, pan, tobacco and intoxicants, clothing and footwear, housing, fuel and light, and a miscellaneous category.

WPI is released by the Central statistics office (Ministry of Statistics and Programme Implementation). It measures the price change of both goods and services and the base year adopted to calculate CPI is 2012. Under CPI There are two different baskets for Urban and rural areas. Urban basket covers 460 items and rural basket covers 448 items. The central currently uses CPI or retail inflation as a key measure of inflation to set the monetary and credit policy.

How WPI inflation is good for the economy?

Retail (CPI) Inflation means an increase in the average price level of baskets of consumers’ goods and services. It is about the household’s expenses, borrowing, and investment. It directly affects consumers because it increases our expenses while, WPI inflation determines an increment in your salary.

If there is deflation in WPI, it means industries and manufacturers are not earning more which means no increment in your salary and may even cause a cut down in a job offer.

Higher CPI inflation causes an increase in expenses of household and WPI deflation cause no increment in earnings, which means consumers have less amount to spend on. Due to the COVID-19 pandemic, retail inflation increased to 7.61 % which is above the danger level and wholesale inflation was in the negative (deflation) that increased the gap between retail and wholesale inflation. And an excessive gap between retail and wholesale inflation takes the economy in bad shape. But for last three month, wholesale inflation has returned to its positive territory that has reduced the gap between CPI and WPI. And minimal gap between these two means increase in expenses and in salary too. So, for now, it can be said that wholesale inflation is good for the economy.

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