Inflation refers to the rate of general price increase over a period of one year. In India, this is measured based on two price indices such as the Wholesale Price Index (WPI) and Consumer Price Index (CPI). Inflation measured through wholesale price index is called wholesale price inflation or headline inflation and inflation measured through consumer price index is called consumer price inflation. Let’s see these indices in detail below.
Wholesale Price Index (WPI)
WPI is the index of prices prevailing in the wholesale market. The concept of wholesale price adopted in practice represents the quoted price of bulk transaction generally at the primary stage. For example, the price pertaining to the bulk transaction of agricultural commodities may be farm harvest prices or prices at the village mandi/market. Similarly, for manufactured goods, the wholesale prices are ex-factory gate level or ex-mine level. In India, the wholesale price index is calculated by the Government on a monthly and yearly basis. The wholesale price index and wholesale price inflation are keenly watched by the observers of the economy and policymakers. The WPI is compiled by the Office of Economic Advisor to the Ministry of Commerce and Industry of the Government of India.
There are three major groups in India’s wholesale price index: 1) Primary Articles 2) Fuel, Power, Lights & Lubricants and 3) Manufacturing Items. Note that the indexes of the three major groups and each of the subgroups under them are publicly available. So, it is possible for us to calculate not only general inflation but also the inflation rate of a particular group (such as primary articles) or sub-group (such as leather and leather products).
Also read: Three forms of Efficient Market Hypothesis
Consumer Price Index (CPI)
CPI is the index of prices prevailing in the retail market. CPI is more relevant to the consumer, since it measures changes in retail prices. The Consumer Price Index represents the basket of essential commodities purchased by the average consumer such as food, fuel, lighting, housing, clothing, articles etc. Inflation measured by using CPI is called consumer price inflation. There are three measures of CPI, which track the cost of living of three different categories of consumers – industrial workers (IW), agricultural labourers (AL) and rural labourers (RL). Each category has its own basket of commodities that represent the consumption pattern of the respective consumer groups. Not only does the basket of commodities differ, but also the weights assigned to the same commodity may be different under different CPI series. For example, food gets a weight of only 48% under CPI-IW, but 73% under CPI- AL. Among the three, CPI-IW is most popular. In the organized sector, CPI –IW is used as the cost of living index. Consumer Price Index is measured on a monthly basis in India. All the three series of CPI are compiled by Labour Bureau of the Labour Ministry of the Government of India. While wholesale price inflation is more popular in India, the Consumer Price Index is a popular measure in developed nations like USA, UK.