What is the WPI and CPI Inflation and why are they different?

CPI and WPI Inflation in India

Inflation is the rate at which level of prices for goods and services is rising in a country. Hence, inflation means the rate at which the purchasing power of a currency is falling. For example, let us assume that inflation rate is 10% for a year. Hence we will have to pay Rs 110 for products which we could buy for Rs 100 until last year, meaning 10% reduction in the buying power of money.

India Indexes to track Inflation.

In India, we use following two indexes to calculate inflation:

  • WPI ( Wholesale Price Index Inflation )
  • CPI ( Consumer Price Index Inflation )
    • Urban CPI {For Urban Population}
    • Rural CPI {For Rural Population}
    • Combined CPI {For Entire India}

WPI (Wholesale Price Index Inflation)

Wholesale Price Index (WPI) is a price index which represents the wholesale price of a basket of goods. Hence WPI tracks the changes in price between it hits the end consumers (people like you and me).  The WPI inflation number is released every month and is published by the Economic Adviser in the Ministry of Commerce and Industry.

Below chart indicates the composition of WPI:

Wholesale price index measures inflation at each stage of production

CPI (Consumer Price Index Inflation or Retail inflation)

Consumer Price Index (CPI) is a price index which represents the average price of a basket of goods over time. In simple words, CPI is based on changes in price at the retail level. The CPI number is released every month by a joint exercise between Central Statistics Office (CSO) and Ministry of Statistics and Programme Implementation (MOSPI).

Below chart indicates the composition of CPI{Combined India}

Until recently WPI was used as a key measure of inflation by RBI and hence impacted the monetary policy(Interest rate direction). However, starting 2012 RBI started using CPI because CPI calculation is geared towards inflation faced by end customers.

Inflation – The Wealth Destructor

Inflation can be tricky to understand and most people do not truly understand, how it eats into wealth. To solve this problem, we developed a calculator which would help you see how inflation destroys wealth.

 Conclusion

When GDP of a country grows over 8% per annum, inflation is bound to be present. However, we are seeing that RBI hawkish stand on inflation is helping and hopefully Indian economy will continue to grow while CPI inflation does not rise above RBI’s target of 4%.