Among the several types of price indices used to measure inflation, WPI or Wholesale Price Index and Consumer Price Index or CPI are quite popular ones. Both of these help economists understand the movement in price over a period of time or serve as useful tools to measure inflation. However, they are quite different in several aspects. Starting from the area of focus to the reference year used for their calculation, the wholesale price index and consumer price index have major areas of difference. But what are all these and how are they relevant? Continue reading as we delve deep into understanding both these indices, their meaning, their impact on the economy, wholesale price index vs consumer price index, and much more.
What is a Price Index?
Before we go deep into understanding WPI and CPI, let's first see what are these. Well, the answer is simple: these are price indices. But what are price indices? A price index, in the most simple terms, is a measure that showcases the fluctuations in prices over a specific period. There are several types of price indices. Some of the most popular examples are the Paasche Price Index, the Laspeyres Price Index, the Wholesale Price Index, the Consumer Price Index, and many more. Each of these is just a measure to study inflation.
Importance of Measuring Inflation
From all the aforementioned discussed, you may easily conclude that all these price indices, the wpi vs. cpi debate, and much more revolve around measuring inflation. But what is inflation and why do we need to measure it?
Inflation is nothing but a simple measure that showcases price changes, including the increase in prices of goods and services over a period. Usually expressed in percentages, inflation is of different types. Some of the examples are hyperinflation, deflation, retail inflation, stagflation, cost-pull inflation, etc.
Measuring inflation is important as it tells a lot about the economy and its state. For example, consistent years of inflation can negatively impact your standards of living given no rise in your income. Meaning, it also affects your purchasing power. Additionally, hyperinflation in an economy can also affect its economic activity, slowing down the same and ultimately limiting economic growth and development.
Further, understanding inflation is very important for investors too. It helps them make decisions around stock investments or fixed-rate investments.
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Understanding Wholesale Price Index (WPI)
Before going any further, let's first understand what WPI is. In the simplest terms, the Wholesale Price Index can be understood as the average price changes in goods over a specific period in the wholesale market. WPI serves as an important tool to measure inflation at the wholesale level. Meaning, you understand the inflation impact on businesses and retailers instead of direct consumers. Thus, it becomes quite useful for businesses, producers, policymakers, and investors to understand WPI. The same helps them understand price trends and pressure, compare demand and supply changes, and do much more. Policymakers also use the index to design monetary and fiscal policies.
You may calculate WPI using a Laspeyres formula. This involves calculating and comparing the prices of different goods at two different time points. This is expressed in percentage. Here is a step-by-step guide for the calculation of WPI:
It starts with the identification of goods to be included in the basket of goods.
Then comes determining the base period. This is generally that time when prices are more or less stable.
Then comes data collection for the prices of goods in the base period and the current period.
Calculate the base period index using the formula: (prices of goods in base period ÷ prices of goods in the current period) ×100.
Calculate the current period index using the formula: (prices of goods in the current period ÷ prices of goods in the base period)× 100.
Now, the difference between the base and the current period expressed in the percentage is your WPI.
Now that you know what WPI is and how it is calculated, let's move ahead and have a look at its components. The WPI has 3 major components
Primary articles include food, non-food materials, and minerals.
Manufactured goods like textiles, metals, machinery, etc.
Fuel & power products like coal, petroleum, etc.
Understanding the Consumer Price Index (CPI)
Now that you have covered all the crucial aspects of WPI, let's see what CPI or Consumer Price Index is. Well, CPI is also another price index like WPI. However, it showcases inflation at the retail level. Meaning that it is calculated using the prices of both goods and services that are directly consumed by the customer. This also makes CPI an effective tool to gauge the purchasing power of individuals and the economy.
The calculation of CPI involves determining the prices of the basket of goods and services that are consumed by the Indian audience. Here, items like food, education, transportation, clothing, and everything else that involves expenditure are taken into account.
Now using the base year determined by the CSO or Central Statistics Office, Ministry of Statistics and Programme Implementation, CPI is calculated using a unique formula.
The formula used for calculating CPI is:
(Price of goods and services in the fixed basket in the current year ÷ Price of goods and services in the fixed basket in the base year) × 100.
Here are some of the components of CPI in India:
Housing
Food and beverages
Clothing and footwear
Tobacco and intoxicants
Fuel
Miscellaneous
Key Differences Between WPI and CPI
Now that you know the meaning of WPI and CPI, let's move ahead and see the differences between the two. Here is a quick table highlighting the difference between the wholesale price index and the consumer price index.⁵
Features
| WPI
| CPI
|
About
| It measures the inflation or the average price changes in the sales of goods at the wholesale or retailer level.
| It measures the inflation or the average price change in the sales of goods and services at the consumer level.
|
Target Audience
| Here, the target audience or the focus of the index is on the goods traded and sold between retailers and businesses.
| Here, the target audience or the focus of the index is on the goods that are directly sold and consumed by the customers.
|
Basket of Goods and Services
| The total number of items covered under WPI is 697.
| The total number of items covered under CPI for rural is 448 and for urban, it is 460.
|
Measurement of Price
| The price measurement of WPI is limited to just goods.
| The price measurement of CPI is done for both: goods and services.
|
Frequency of Data Collection
| The data is collected frequently and released weekly for the primary items on the WPI. For the rest, it is done on a monthly basis.
| The data is collected and released every month.
|
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Impact of WPI and CPI on the Economy
Understanding WPI and CPI, WPI vs CPI, and the impact they have can come quite handy for businesses, policymakers, and consumers. Let's see how.
As mentioned, WPI is used to measure the average change in goods prices at the wholesale level. Here is how it is used by businesses.
Cost Adjustments
Businesses may use WPI to understand cost changes and the pressure according to it. Based on the same, businesses can manage their operations.
Pricing
Understanding WPI also comes in handy to businesses in determining the prices of goods.
Planning Production Strategies
Based on the index, businesses and producers can design and decide their production quality, quantity, and other relevant strategies.
How CPI Impacts Consumers and Households
The CPI shows the price changes in goods and services directly consumed by the general public. And so, it has a huge impact on consumers and households. Here's how.
Determines Purchasing Power
CPI involves the measurement of the average change in the prices of goods and services over a specific period. And the target audience is the general consumers. Thus, it has a direct impact on the purchasing power of the public and the economy.
Aids in Economic Decisions
Businesses, as well as customers, use CPI to understand price changes and make informed decisions based on the same.
Conclusion: WPI vs CPI - Which is More Relevant?
There is a lot of debate around which index is better. When talking of wholesale price index vs consumer price index, it is important to understand that both of these tools are used to measure the average price changes. However, they have some major differences in their meaning and calculation. Both the wholesale price index and consumer price index are used by businesses and policymakers to make business and economic policies, respectively. CPI, showcasing the direct impact on the audience, is more commonly used for making payment and individual economic decisions. Government and policymakers use these tools to gain valuable information and design the economic policies of the country accordingly.
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