Wholesale Price Index (WPI) & Inflation

Inflation in its simplest term means increase in prices. Governments in various countries are trying to balance economic growth and inflation. India too follows the same track. Tracking inflation accurately thus becomes a pre-condition for devising appropriate strategies for growth. . 

What is a price index?

Price increase for various commodities rarely becomes uniform. When prices of different products are increasing at varying rates, arriving at a single value representing price increase becomes a great challenge. This is addressed by constructing price index. In this method, an overall rate is arrived at by assigning different weights to different commodities. High weightage will be assigned to items consumed on daily basis by majority of population like wheat, rice, pulses etc. Prices of items with large weightage will have more bearing while arriving at the overall value than those that have low weight. 

Different types of price indices in India for measuring inflation

India employs five types of price indices. They are

Inflation in India is calculated on the basis of WPI. However, in 2014, RBI adopted a new Consumer Price Index (CPI combined) in place of WPI as the key measure of inflation and for monetary policy framework.

Wholesale Price Index (WPI)

WPI is the most commonly used index for measurement of price rise. WPI is a weighted average price index of critical commodities, which impacts overall Indian economy. It tracks the price paid by a wholesaler to the producer for a large basket of commodities, including industrial commodities.   It includes prices of steel, cement, food grains etc but does not cover services and non –tradable commodities.  The headline inflation in India is measured in terms of WPI( Core inflation shows price rise in all goods and services excluding energy and food articles. Headline inflation shows price rise in all goods and services including energy and food articles). 

Wholesale Price Index is calculated on a point to point basis. The WPI at the end of a particular month is compared with WPI on the same day in the previous year and the percentage change in the WPI is the rate of WPI inflation. WPI series in India has under gone seven changes. The present series with base year 2011-12 contains 697 commodities and 8331 quotations  and the list was released in May 2017.  The 697 commodities are made up of as shown below:

All commodities     : 697 (100%)
Primary articles        : 117 ( 22.62%)
Fuel & Power         : 16 (13.15%)
Manufactured products: 555 (64.23%)

Currently, India has same base year, 2011-12 for Index of Industrial Production (IIP), Wholesale Price Index (WPI), Consumer Price index (CPI) and Gross Domestic Product (GDP).