BackDYK: The components of WPI and CPI differ
While both indices measure the rate of inflation, there is a vast difference in the components
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The Reserve Bank of India (RBI) on 29 November announced that it is going to launch inflation-indexed savings securities for retail investors. Unlike the tranche announced in May, this one will be indexed to the Consumer Price Index (CPI) rather than the Wholesale Price Index (WPI). While both indices measure the rate of inflation, there is a vast difference in the components.
Wholesale Price Index
As the name suggests, this index looks at the change in wholesale prices. You can look at it like a basket of goods for which the change in their bulk prices are noted from one period to another. For example, the last WPI release showed a change of 7%. This means compared with the level a year ago, prices of goods in the basket have collectively increased 7%. Also, the goods are placed in a certain proportion in the wholesale basket.
Around 20.12% of the basket consists of primary articles; this includes food articles such as cereals, meat, fish, fruits and vegetables. It also includes non-food articles such as cooking oil, cotton, jute and minerals. The next big group is fuel and power (14.91%) and this includes elements such as electricity, mineral oils and coal. Items such as kerosene, diesel, liquefied petroleum gas and petrol also fall in this category.
However, the biggest group is manufactured goods (64.9%). There are many sub-groups in this category; some of the main ones are chemical and chemical products, basic metals, alloys and metal products, food products, machinery and machine tools and textiles. Changes in bulk prices of items in the WPI basket may not affect you or your spending directly but ultimately this trickles down to retail prices as well.
Consumer Price Index
This index is linked to consumer prices or prices of retail goods. The basket of goods is very different from the WPI basket. Earlier the CPI was compiled for three segments—industrial, agricultural and rural workers. However, in 2012 this got changed and is now compiled as urban household and rural household linked CPI. This is relevant because the consumption patterns vary vastly in urban and rural India. The CPI is like your shopping basket. The new CPI has five sub-groups including food and beverages, fuel and light, housing and clothing, bedding and footwear. The weightages differ for the rural and urban baskets. For example, the urban basket has a much higher weightage to housing related items. Unlike the WPI, this is more relevant to an individual’s daily expenditure.
There are some common components in both baskets—such as fuel and food articles—but here as well, the CPI focuses mainly on end consumption linked articles whereas the WPI as a mix of both. If you look at the end number as well, the latest WPI inflation stands at 7%, whereas the CPI inflation figure is 10.09%. Given the composition of both indices and the difference in inflation as calculated under both, it makes sense to have inflation-indexed bonds meant for retail investors linked to CPI.
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