WPI

Disclaimer: Copyright infringement not intended.

Context

• In April, India's wholesale price inflation rose to a 13-month high of 1.26%, up from 0.53% in March.
• This increase was driven by a surge in food inflation and a 1.4% year-on-year rise in fuel and power prices, following several months of deflation.

Findings

Monthly and Yearly Trends

Year-on-Year Trends

• April marked the sixth consecutive month of year-on-year Wholesale Price Index (WPI) increases, after seven months of deflation.
• The WPI rose 0.8% on a month-on-month basis, with primary articles and food prices increasing nearly 2% in April.
• Manufactured products saw a 0.5% price rise.

Food Inflation

• Food inflation reached a four-month peak of 8.7% in April.
• The price rise in primary food articles increased from 6.88% in March to 7.74% in April.
• Despite a slight easing in cereals and pulses inflation, which stood at 8.7% and 16.6% respectively, vegetable inflation surged to 23.6% from 19.5% in March.

Specific Food Items

• Potatoes and Onions: Sharp inflation increases to 72% and 59.8%, up from 53% and 57% in March.
• Paddy: Inflation increased to over 12%.
• Eggs, Meat, and Fish: Price rise of 0.9% in April, compared to a 1.86% decline in March. Retail level inflation was 7.1% for eggs and over 8% for meat and fish.
• Wheat and Milk: Price rise eased slightly to 5.7% and 4.3% respectively.
• Fruits: Prices decreased by 1.8% compared to last April.

Wholesale Food Index

• The Wholesale Food Index rose 5.5% in April, compared with 4.65% in March.

Manufactured Products

• The decline in manufactured products’ prices eased to 0.4% in April from 0.8% in March.
• Inflation in primary articles increased from 4.5% in March to 5% in April, indicating a broad-based reversal of wholesale price trends.
• 11 of the 17 manufactured products tracked for the WPI recorded lower prices than a year ago. The price decline in edible oils reduced to 5% in April, from over 8% in March.
• Prices for food products and beverages increased by 1.25% and 1.6% respectively. Wearing apparel prices rose by 2.34%, the fastest pace in at least six months.

Fuel and Power

• Crude petroleum and natural gas inflation increased from 4.87% in March to 4.97% in April.
• Fuel and power inflation turned positive after months of decline, with the drop in diesel prices easing to 1.86% from 3.5% in March.

What is 'Wholesale Price Index'?

• Definition: Wholesale Price Index (WPI) represents the price of goods at a wholesale stage i.e. goods that are sold in bulk and traded between organizations instead of consumers. WPI is used as a measure of inflation in some economies.
• Description: WPI is used as an important measure of inflation in India. Fiscal and monetary policy changes are greatly influenced by changes in WPI. In the United States, Producer Price Index (PPI) is used to measure inflation.
• WPI is an easy and convenient method to calculate inflation. Inflation rate is the difference between WPI calculated at the beginning and the end of a year. The percentage increase in WPI over a year gives the rate of inflation for that year.

Exclusion of services

• The Wholesale Price Index (WPI) measures changes in the average prices of goods at the wholesale level—commodities sold in bulk and traded between businesses or entities, rather than goods bought by consumers.
• The WPI does not account for the price of services and does not reflect the consumer price situation directly.

Purpose and Release

• WPI is calculated and published by the Office of Economic Advisor, Department of Industrial Policy and Promotion in the Ministry of Commerce and Industry.
• They publish the data on a monthly basis. It is also called the headline inflation rate because a month-on-month rise in WPI is an indication of rising inflation in the economy.
• Its primary purpose is to monitor the movement in prices of goods that reflect supply and demand in industry, construction, and manufacturing. The index basket of WPI categorizes commodities under three groups:

1. 1. Primary Articles
   2. Fuel and Power
   3. Manufactured Products

Historical Revisions and Frequency

• In April 2017, the government revised the base year for WPI from 2004-05 to 2011-12.
• WPI is extensively used for short-term policy intervention as it is the only index that is available on a weekly basis.

Base Year Any index is calculated against an anchored year, called base year. Base year refers to the first year of the series in calculating an index.  By default, it is assigned value 100 for the benefit of calculation. It is adjusted time-to-time to include differences and make it accurate for advanced year calculation. The base year for calculation of WPI was 2004-05 earlier, but to align it with other economic indicators, the base year was updated to 2011-12. With every revision of the base year, the basket of goods and their weightage also change. Different products have different weightage in the WPI basket of goods.  The prices of a total of 697 items are tracked under the 2011-12 series of the wholesale price index, which includes 117 primary items, 16 items of fuel and power and 564 manufactured products. In the latest adjustment when base year was changed to 2011-12, 199 new items were added, and 146 products were dropped. Multiple price quotations of each item are taken for the calculation of the wholesale price index. In the latest adjustment, taxes were excluded from the calculation of WPI to omit impact of fiscal policy on the index. For instance, the rollout of the goods and services tax did not have an impact on the WPI index due to the modification.

Importance and Usage

• WPI is crucial for measuring both macroeconomic and microeconomic conditions of the economy.
• It provides estimates of inflation at the wholesale transaction level for the overall economy, facilitating timely government intervention to monitor inflation before it affects retail prices.
• Wholesale prices affect retail prices, which has an impact on household finances. Excessive inflation in wholesale prices will reflect in retail prices and it can be damaging for the economy. WPI helps the government take timely action against inflation, especially inflation in prices of essential commodities.
• Secondly, the WPI index is also used as a deflator for many sectors of the economy. Without adjusting the inflation against GDP growth, it is not possible to get a clear picture of the size of the GDP.
• The wholesale price index is used for indexation of business contracts. Commodity traders use WPI for the valuation of future contract And lastly, WPI is a critical macro-economic indicator, which is tracked by global investors for investment decisions.

Policy and Economic Relevance

• The WPI-based inflation is used by the government for preparing fiscal, trade, and other economic policies.
• It serves as an indexing tool for business organizations, policymakers, accountants, and statisticians to formulate price adjustment clauses.
• An increase in WPI indicates inflationary pressure in the economy, and vice versa.
• The extent of the rise in WPI measures the level of wholesale inflation in the economy.

How does the WPI Work?

• WPI is reported monthly. At the end of the year, the agency calculates the total cost of goods and compare it against the base year. Since the default value of the base year is 100, the deviation of the current is then reported at a percentage.
• Let’s assume that the base year (2011-12) price of the goods under consideration was Rs 1500. In 2020 the price changed to Rs 2100. So, WPI of the item in 2020 is (2100-1500)/8 or 7.5 percent.
• WPI is not a constant number. It varies from country to country, even from year to year.
• Gradual movement of WPI is an important indicator that shows the government how product prices are moving in the economy.

Differences between WPI and CPI:

Comparison	WPI	CPI
Measurement	Measures average change in prices received by domestic producers for their output	Measures average change in prices of goods and services consumed by households
Indicator of Inflation	Leading indicator of inflation	Lagging indicator of inflation
Coverage and Sample Size	Covers a smaller sample of goods and services	Covers a broader range of goods and services used by households
Purpose	Mainly used to track inflation in wholesale market	Primarily used for tracking inflation in consumer market
Components	Includes prices of primary articles and fuel	Includes prices of food, housing, clothing, transport, medical care, etc.
Weightage	It gives a higher weightage to primary articles and fuel	It provides a higher weightage to food and housing
Base Year	Base year is usually updated every 5 years	Base year is generally updated every 10 years
Impact on Monetary Policy	Direct impact on monetary policy	Indirect impact on monetary policy

Key Differentiating Factors Between Wholesale Price Index (WPI) and Consumer Price Index (CPI)

Purpose

• Economists and analysts use WPI to make policy decisions.
• The RBI uses WPI to determine the interest rate.
• The government uses CPI to adjust social security payments, tax brackets and interest rates.

Measurement

• WPI captures the prices of commodities at different stages of production.
• CPI captures the prices of goods and services consumed by households.

Coverage and Sample Size

• WPI covers limited goods and services traded in the wholesale market.
• CPI covers a wider range of goods and services consumed by households.

Indicator of Inflation

• WPI reflects price movements in wholesale market before reaching consumer market.
• CPI reflects price movements in consumer market after reaching it. 

Weightage

• WPI’s weightage is based on various shares in the wholesale market.
• CPI’s weightage is based on the consumption pattern of households.

Components

• WPI includes prices of raw materials, intermediate, and finished goods.
• CPI includes prices of goods and services consumed by households.

Base Year

• WPI’s base year is typically updated every 5 years.
• CPI’s base year is typically updated every 10 years.

ALL ABOUT INFLATION: https://www.iasgyan.in/daily-current-affairs/inflation-19#:~:text=Inflation%20measures%20the%20average%20price,items%20is%20called%20'deflation'.

GDP DEFLATOR: https://www.iasgyan.in/daily-current-affairs/national-income-concepts#:~:text=GDP%20deflator%20is%20a%20factor,the%20effect%20of%20rising%20prices.

PRACTICE QUESTION Q. Evaluate the recent trends in inflation in India, focusing on the Wholesale Price Index (WPI) and Consumer Price Index (CPI). Discuss the primary factors driving these trends and the impact on various economic sectors. Critically analyze the measures adopted by the government and the Reserve Bank of India (RBI) to manage inflation.

SOURCE: THE HINDU