Difference Between WPI and CPI
WPI and CPI are critical economic measures that serve specific roles in assessing price movements within an economy. However, they focus on different aspects of the economy and have distinct applications. The WPI tracks wholesale prices of goods, while the CPI measures the average prices paid by households for a basket of goods and services. Central banks in many countries, including India, have shifted their focus from WPI to CPI or retail inflation when formulating monetary policy. In this blog, we will discuss the concepts of WPI and CPI and the difference between WPI and CPI.
Explore finance courses
WPI vs CPI – Tabular Comparison
| Aspect | WPI (Wholesale Price Index) | CPI (Consumer Price Index) |
| Purpose | Measures inflation at the wholesale level, focusing on changes in the prices of goods. | Measures inflation at the consumer level by tracking the prices of goods and services commonly purchased by households. |
| Basket of Goods | Includes a broader range of goods, including raw materials, intermediate goods, and finished goods at the wholesale level. | Comprises goods and services typically consumed by households, such as food, clothing, housing, healthcare, transportation, and entertainment. |
| Data Collection | Focuses on prices at the wholesale level, often before goods reach consumers. | Gathers prices directly from households and businesses, reflecting actual consumer spending. |
| Target Audience | The primary audience includes businesses, producers, and policymakers concerned with producing and distributing goods. | The primary audience includes policymakers, central banks (RBI), economists, and the general public. |
| Categories of Goods | Organized into categories such as primary articles, including food and sustainable products, fuel and power, and manufactured products. | Organized into categories such as food, clothing, housing, fuel and light, miscellaneous goods and services, and more. |
| Inflation Calculation | Inflation calculation considers price changes at various stages of production and distribution, affecting businesses. | Inflation calculation reflects changes in the weighted average of prices of items in the consumer basket, providing a consumer’s perspective on inflation. |
| Impact on Monetary Policy | WPI can influence production, inventory management, and supply chain decisions. | CPI has a direct impact on monetary policy. Central banks use CPI to set inflation targets and adjust interest rates. |
| How It Reflects Economic Health? | Reflects inflationary pressures faced by businesses. | Reflects the cost of living and impacts consumer spending patterns. |
| Global Comparison | Commonly used for international trade and price negotiations. | Used worldwide to compare inflation rates and assess the cost of living. |
Best-suited Commodity & Currency Markets courses for you
Learn Commodity & Currency Markets with these high-rated online courses
What is WPI?
WPI, or Wholesale Price Index, is an economic indicator that measures the average change in the prices of goods at the wholesale or producer level within an economy. WPI helps to track inflation trends in the early stages of the supply chain before goods and services reach consumers.
The WPI is a weighted index, meaning that different items in the basket have different weights. The weights are based on the importance of each item in the economy. For example, food items may have a higher weight than clothing items because food is more essential to livelihood.
Calculation of WPI
The formula for WPI is as follows –
Where:
- Current price is the price of the good in the current year.
- Base year price is the price of the good in the base year (Base year is a reference year against which price changes are measured).
What is CPI?
CPI, or Consumer Price Index, measures the average price change consumers pay for a basket of goods and services over time. It reflects the cost of living for the average consumer and is often used by governments, central banks, economists, and policymakers to monitor and manage inflation.
Calculation of CPI
Where,
Value of Basket: A representative basket of goods and services is selected to reflect the spending patterns of the average consumer. This basket includes food, clothing, housing, healthcare, transportation, etc.
Example of CPI Calculation:
Suppose the basket of goods and services for an average household in the base year costs Rs. 5,000. The same basket of goods and services costs Rs. 5,500 this year.
Using the CPI formula, we can calculate the index for the current year:
CPI = (Rs. 5,500 / Rs. 5,000) x 100
=> 1.1 x 100 = 110
So, the CPI for the current year is 110, indicating a 10% increase in the cost of living for the average household compared to the base year.
Which is A Better Measure of Inflation – WPI or CPI?
Using CPI or retail inflation can be a better measure of inflation. The CPI aligns with the central bank’s goal of maintaining price stability and ensuring that the cost of living for the general public remains within a target range.
As CPI reflects, retail inflation is often more relevant to the everyday experiences of consumers and households, making it a better indicator for monetary policy decisions aimed at controlling inflation and promoting economic stability.
Central banks need to consider the impact of inflation on the purchasing power and well-being of the public, which CPI is better equipped to capture. Therefore, the Reserve Bank of India (RBI) and many other central banks worldwide have transitioned to using CPI or retail inflation as their primary measure for making policy decisions, such as setting interest rates like the repo rate.
FAQs
Which index is more relevant for assessing the impact of inflation on individuals?
CPI is more relevant for assessing how inflation affects individuals because it reflects consumer expenses and their ability to maintain their standard of living.
Do both WPI and CPI use the same base year for their calculations?
Both indices may use different base years, which are periodically updated to reflect changing economic conditions and consumption patterns.
Can WPI and CPI provide early warnings of potential inflationary pressures?
Yes, WPI, an early indicator of price changes in the production process, can be an early warning of potential inflationary pressures in the broader economy.
How do central banks use CPI and WPI in their monetary policy decisions?
Central banks often rely on CPI to set inflation targets and adjust interest rates to stabilize prices. WPI may inform their understanding of cost pressures in production.
Is one index considered more accurate than the other?
Neither index is inherently more accurate; they serve different purposes. Accuracy depends on their relevance to the analysis's specific economic context and goals.
Rashmi is a postgraduate in Biotechnology with a flair for research-oriented work and has an experience of over 13 years in content creation and social media handling. She has a diversified writing portfolio and aim... Read Full Bio
Top Picks & New Arrivals
