The Reserve Bank of India (RBI) uses both WPI and CPI to formulate its monetary policy. WPI is an indicator of inflation in the wholesale market, while CPI is an indicator of inflation in the consumer market. The RBI also uses these indicators to determine the interest rate and make other monetary policy decisions.
Difference Between Wholesale Price Index and Consumer Price Index
Measuring inflation is crucial for understanding the health of the economy. Two important indexes used for this purpose are the Wholesale Price Index (WPI) and the Consumer Price Index (CPI). Both indexes provide insight into the changes in prices of goods and services in the country, but they measure different aspects of the economy and serve unique purposes.
Hence, this guide explains all about WPI vs CPI in detail.
What Is Wholesale Price Index (WPI)?
Wholesale Price Index (WPI) is a measure of the average change in prices received by domestic producers for their output.
WPI is calculated using the Laspeyres formula, taking into account the costs of various commodity groups and their weightage in the economy.
- WPI measures the price changes in the wholesale market.
- It reflects the prices at the producer level.
- WPI captures prices of commodities at different stages of production.
- It is also used to track inflation in the economy.
The Reserve Bank of India uses WPI as an indicator of inflation in the wholesale market. WPI is considered a leading indicator of inflation as it reflects the price movements in the wholesale market before it reaches the consumer market.
What Is Consumer Price Index (CPI)?
Consumer Price Index (CPI) is a measure of the average change in prices of goods and services consumed by households. CPI is calculated based on the consumption expenditure patterns of households, taking into account the prices of goods and services consumed by households in various segments such as rural, urban, and combined.
- CPI measures the price changes in the consumer market.
- It reflects the prices at retail level.
- CPI captures prices of goods and services consumed by households.
- It is also used to track inflation in the economy.
The Reserve Bank of India uses CPI as an indicator of inflation in the consumer market to determine interest rates and make other monetary policy decisions. CPI is considered a lagging indicator of inflation as it reflects the price movements in the consumer market after reaching the consumer market.
What Are the Differences Between Wholesale Price Index and Consumer Price Index?
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
Mainly used to track inflation in wholesale market
Primarily used for tracking inflation in consumer market
Includes prices of primary articles and fuel
Includes prices of food, housing, clothing, transport, medical care, etc.
It gives a higher weightage to primary articles and fuel
It provides a higher weightage to food and housing
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)
- 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.
- WPI captures the prices of commodities at different stages of production.
- CPI captures the prices of goods and services consumed by households.
3. 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.
4. Indicator of Inflation
- WPI reflects price movements in wholesale market before reaching consumer market.
- CPI reflects price movements in consumer market after reaching it.
- WPI’s weightage is based on various shares in the wholesale market.
- CPI’s weightage is based on the consumption pattern of households.
- WPI includes prices of raw materials, intermediate, and finished goods.
- CPI includes prices of goods and services consumed by households.
7. Base Year
- WPI’s base year is typically updated every 5 years.
- CPI’s base year is typically updated every 10 years.
Hence, with a better understanding of WPI vs CPI, it is apparent that WPI and CPI both aid in measuring inflation and understanding economic health. Furthermore, the government uses these indexes to make decisions regarding subsidies, social security payments, tax brackets, and other government benefits. However, these indexes’ calculation, methodology, and coverage may vary depending on the country.
FAQs About WPI vs CPI
WPI and CPI play crucial roles in government policies. The government uses data provided by these indexes for various decision-making purposes, including:
- Social security payments
- Tax brackets
- Fiscal policies
- Allocation of funds
- Adjustment of budget
- Other government benefits
The Office of Economic Adviser (OEA) under Ministry of Commerce and Industry, Government of India, calculates and publishes WPI. The Central Statistics Office (CSO) under Ministry of Statistics and Programme Implementation, Government of India, estimates and publishes CPI.
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