WPI and CPI

What is meant by inflation?

Inflation indicates the rise in price of a basket of commodities on a point-to-point basis. It basically suggests an increase in the cost of living over a period of one year. For instance, you buy 10 essential commodities on January 1, 2004, for Rs 100. If the same set of 10 commodities costs Rs 105 on January 1, 2005, the inflation rate would be 5%. It would mean that the prices are rising at 5% per annum. The rate of inflation is high if the prices are rising by 7%-8% or more and low if the prices are rising at 2%-3%. A decline in prices results in deflation which is not good for the economy. Economists believe that moderate inflation is good for a growing economy as it provides incentives for growth.

What is the Wholesale Price Index (WPI)?

To calculate inflation, the inflation-computing agency collects the prices of identified commodities. The agency can take into account wholesale prices, retail prices or factory-gate prices. As wholesale markets are few in number, it is easier to collect the prices of goods traded there. The Wholesale Price Index (WPI) takes into account the wholesale prices of over 400 commodities.

The base year for the present WPI index, which is computed by the ministry of commerce and industry, is 1993-94. The 100-point index is subdivided into three groups. The primary articles, which include food and non-food agriculture products, have a weight of 22.02% in the index. Manufactured goods have the highest weight of 63.75%. Fuel and power account for 14.23%. The government is now ready with a revised index with a new base year.

Why does the WPI need revision?

The WPI must reflect the consumption pattern of people in order to truly reflect the price rise. To be effective, the basket of commodities whose prices are tracked must be relevant. For instance, not many people were using cellphones in 1993-94 but are using them extensively now. So their prices and those of mobile services have become important. An index that does not take into account the changing prices of mobile services won’t be relevant in today’s context.

Similarly, consumption patterns change with an increase in income. People spend more on clothes, recreation and holidays as incomes rise. But less amounts (as percentage of income)on food and other essential items.

The working group on WPI, headed by Planning Commission member Abhijit Sen, has worked out a new index. The base year of the new index will be upgraded to 2000-01. And the basket of commod-ities will be expanded to around 1,200 to reflect the post-liberalisation consumption pattern.

What is the Consumer Price Index (CPI)?

The CPI (industrial workers) is based on changes in prices at the retail level. The index, worked out by the ministry of labour, is used to measure the cost of living. CPI is used by the government, private sector, embassies, etc to compute the dearness allowance (DA). The government is also revising the CPI (IW). The base year will be upgraded to 2001 from 982. There is an index for urban non-manual employees (CPI-UNME) too for which the base year is 1984-85 and an index for agricultural labours (CPI-AL) with base year 1986-87. These indices serve different purposes.

What are the other inflation indices?

The working group on WPI is also working on the Service Price Index (SPI) and the Producer Price Index (PPI). The share of the service sector in the Gross Domestic Product (GDP) has gone up from about 28% in 1950 to over 50% now. Also, service tax has emerged as an important source of revenue for the exchequer. In view of the importance of this sector in national income, the working group has made a case for measuring changes in the prices of services.

As for PPI, it would reflect changes in the prices of manufactured items at the factory-gate. It will not consider taxes, trade margins and transport costs. The government ultimately proposes to replace the WPI with the PPI, which is considered an improvement over the former.