What is Inflation (WPI & CPI) ?

Inflation refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc.

Inflation measures the average price change in a basket of commodities and services over time.

Inflation is indicative of the decrease in the purchasing power of a unit of a country's currency.

This could ultimately lead to a deceleration in economic growth.

However, a moderate level of inflation is required in the economy to ensure that production is promoted.

In India, inflation is primarily measured by two main indices — WPI & CPI which measure wholesale and retail-level price changes, respectively.

As per RBI, an inflation target of 4 per cent with a +/-2 per cent tolerance band, is appropriate for the next five years (2021-2025).

What is the Wholesale Price Index (WPI) ?

It measures the changes in the prices of goods sold and traded in bulk by wholesale businesses to other businesses.

Published by the Office of Economic Adviser, Ministry of Commerce and Industry.

It is the most widely used inflation indicator in India.

Major criticism for this index is that the general public does not buy products at wholesale price.

The base year of All-India WPI has been revised from 2004-05 to 2011-12 in 2017.

What is the Consumer Price Index (CPI) ?

It measures price changes from the perspective of a retail buyer, it is released by the National Statistical Office (NSO).

The CPI calculates the difference in the price of commodities and services such as food, medical care, education, electronics etc, which Indian consumers buy for use.

The CPI has several sub-groups including food and beverages, fuel and light, housing and clothing, bedding and footwear.

Four types of CPI are as follows:

1) CPI for Industrial Workers (IW).
2) CPI for Agricultural Labourer (AL).
3) CPI for Rural Labourer (RL).
4) CPI (Rural/Urban/Combined).

Of these, the first three are compiled by the Labour Bureau in the Ministry of Labour and Employment.

Fourth is compiled by the NSO in the Ministry of Statistics and Programme Implementation.

Base Year for CPI is 2012.

Recently, the Ministry of Labour and Employment released the new series of Consumer Price Index for Industrial Worker (CPI-IW) with base year 2016.

The Monetary Policy Committee (MPC) uses CPI data to control inflation.

In April 2014, the Reserve Bank of India (RBI) had adopted the CPI as its key measure of inflation.

Difference between CPI and WPI

WPI tracks inflation at the producer level and CPI captures changes in prices levels at the consumer level.

WPI does not capture changes in the prices of services, which CPI does.

In WPI, more weightage is given to manufactured goods, while in CPI, more weightage is given to food items.