Understanding the two metrics measuring rate of inflation – WPI and CPI

Both the Wholesale Price Index (WPI) and Consumer Price Index (CPI) indices, indicating rising inflation in India are touching new highs every month.

Data released by the Ministry of Commerce and Industry showed that wholesale inflation (WPI) in India rose to 15.08% in April this year. WPI has been in double digits for the 13th consecutive month since April last year.

Data released by the National Statistical Office showed that retail inflation(CPI) rose to a near 8-year high of 7.79 percent in April, remaining above the Reserve Bank's inflation target for the fourth straight month.

What is the rate of inflation?

Inflation refers to the rise in the prices of goods and services of daily or common use, such as food, clothing, housing, transport, consumer staple, recreation, etc.

Inflation measures the average price change in a basket of commodities and services over a certain period of time.

Inflation is indicative of the decrease in purchasing power of a unit of a country's currency. This can ultimately lead to a deceleration in economic growth.

However, a moderate level of inflation is required in the economy to ensure that production is promoted.

In India, inflation is primarily measured by two main indices– WPI and CPI, which measures wholesale and retail-level price changes, respectively.

Difference between CPI and WPI

Many people still get confused about WPI and CPI, what they measure and how they are different.

CPI takes into account the change in process of both goods and services while WPI takes into account the change in the price of goods only.

CPI measures price changes from the perspective of a retail buyer, while WPI calculates the changes in the prices of goods sold and traded in bulk by wholesale businesses to other businesses.

In other words, CPI captures changes in price levels at the consumer level and WPI tracks inflation at the producer level.

In CPI, more weightage is given to food items, while in WPI, more weightage is given to manufactured goods.

CPI data is published by the National Statistical Office (NSO), Ministry of Statistics and Programme Implementation (MoSPI). On the other hand, WPI data is published by the Office of Economic Adviser, Ministry of Commerce and Industry.

The base year for calculating CPI is 2012 while the base year for WPI is 2011-12.

The Monetary Policy Committee (MPC) uses CPI data to control inflation. In April 2014, the Reserve Bank of India (RBI) adopted the CPI as its key measure of inflation.