Measures of inflation: Understanding CPI and WPI, and how they differ

The key difference is that one works at the production level, the other at the level of the household; but there are a few other differences as well

Inflation is the increase in the general prices of goods and services in an economy, and indicates the decrease in the purchasing power of a unit of a country’s currency.

Simply put, inflation is when there is a rise in prices and the consequent decline in purchasing power over time.

Notably, a moderate level of inflation is required in the economy to provide a boost to production.

In India, inflation is primarily measured by two main indices: The Wholesale Price Index (WPI) and Consumer Price Index (CPI), also known as retail inflation.

Wholesale Price Index

The index numbers used to measure the change in the overall price of goods before they are sold at retail prices constitute the WPI.

This index measures inflation based on wholesale prices, or the prices of goods before they reach consumers.

WPI helps in monitoring price movements that reflect supply and demand in industry, and manufacturing and construction activity. It, therefore, helps analyse both macroeconomic and microeconomic conditions.

The WPI focuses on the price of goods traded between corporations, and has an influence on the stock and fixed price markets.

The Economic Adviser in the Ministry of Commerce and Industry reports the wholesale price index monthly to track the overall rate of change in producer and wholesale prices.

WPI is set at 100 for its base period, and is calculated based on subsequent price changes for the aggregate output of goods.

WPI= (Current Price/Base Period Price) × 100

Consumer Price Index

The index numbers used to calculate the retail inflation of a nation constitute the CPI, which is also known as the "market basket", and is responsible for tracking the shift in prices at the level of the household.

It is an important tool to evaluate inflation and deflation of a country.

Essentially, the CPI captures changes in prices at a consumer level. It can also capture the change in the prices of services, which the WPI cannot.

According to the International Monetary Fund's definition, "CPIs are index numbers that measure changes in the prices of goods and services purchased or otherwise acquired by households, which households use directly or indirectly, to satisfy their own needs and wants."

The IMF says that in practice, most CPIs are calculated as weighted averages of percentage price changes for a specified set, or "basket", of consumer products, the weights reflecting their relative importance in household consumption in some period.

CPI compares the prices of goods and services to those prevalent during the same period in a previous year. Numerically, CPI = (Cost in a given year/Cost in base year) x 100

The Central Statistics Office (CSO) publishes CPI data every month.

Difference between CPI and WPI

• CPI captures price change at the consumer level, WPI captures the production side.
   
• WPI does not capture changes in the prices of services, CPI does.
   
• WPI gives more weight to manufactured goods, CPI gives more weight to food items.
   
• WPI uses Financial Year as a reference, CPI uses the calendar year.
   
• WPI measures the initial or first stage of a transaction, CPI is the final or last stage of a transaction