Home >News >India >Never the twain shall meet: Why gap between WPI and CPI based inflation widening

While the retail inflation as measured by the Consumer Price Index (CPI) touched a 16 month high at 4.62% in October, the wholesale price inflation measured by the Wholesale Price Index (WPI) is at the verge of entering the negative territory. The gap between the two is currently the widest in two years.

In October, wholesale price inflation dropped to 0.16% as compared to 0.33% a month ago, data released by the commerce and industry ministry showed on Thursday. Most analysts expect WPI inflation to decline further in coming months, weighed by a base effect.

Wholesale price deflation would signal that producers lack pricing power and may be offering discounts at a time consumer expenditure has dropped to an 18 quarter low in the April-June period. For example, automakers offered heavy discounts during the festive season to break the trend of falling sales. Factory output data for September released on Monday also showed that production of both consumer durables and consumer non-durables contracted during the month, while overall output shrank to its lowest level at least in seven years.

Why is retail inflation then touching new heights? It is mainly because CPI and WPI are two different sets of indicators with varied compositions. Manufactured items have the highest weight of 64.23% in WPI, while fuel and primary articles have 13.15% and 22.62% weight, respectively. On the other hand, food and beverages have the highest weight of 54.18% in CPI, while services sectors such as health, education and amusement have a combined weight of 27.26%. So the supply shortage of onions and tomatoes due to floods and unseasonal rains has a disproportionate impact on the overall retail inflation than wholesale price inflation. On the other hand, a spike in crude oil prices or rise in other commodity prices would drive WPI based inflation up faster than the CPI based inflation. However, retail food inflation often mimics the wholesale food inflation as the price rises are first reflected in the wholesale market than in the retail market.

In October, retail food inflation quickened to 7.89% following similar print in wholesale price inflation in September at 7.47%.

The WPI based inflation has lost the primacy that it once enjoyed in economic policy debates when RBI signed the monetary framework pact with the Centre in 2015. Now, the RBI is mandated to only achieve the medium-term target for CPI inflation of 4% within a band of two percentage points.

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