India's WPI inflation cools down to 13.56% in December 2021
- The decline in WPI inflation in December 2021 was driven by a fall in prices of fuel items, with wholesale fuel and power inflation climbing down to 32.30 per cent from 39.81 per cent in November 2021
- While the all commodity index of the WPI declined by 0.3 per cent month-on-month in December 2021, the fuel and power group index of the WPI fell by 2.7 per cent.
- The food index also declined sequentially, although by a smaller 0.8 per cent.
- The wholesale price index is an index that measures and tracks the changes in the price of goods in the stages before the retail level.
- WPI is used as a measure of inflation in some economies.
- WPI includes three components viz,
- Manufactured products - 64.2%
- Primary articles - 22.6%
- Fuel and power - 13.1%
- Instead of the earlier 2004-05, the base year for the WPI will be 2011-12.
- The number of items covered in the new series of the WPI has increased from 676 to 697.
What are the issues with WPI?
- Under the Flexible Inflation Targeting(FIT), as the RBI has been mandated to achieve price stability measured in terms of CPI inflation, the use of WPI inflation has been completely done away with.
- GDP deflator, which is defined as a ratio of GDP at current prices to GDP at constant prices multiplied by 100, closely tracks WPI inflation.
- One of the striking features of the new WPI series is that the item level averaging is being done by using geometric mean.
- This is as per international best practice.
- The geometric mean itself has significantly moderated WPI inflation, besides other factors such as changes in the composition of the basket.
- Moderation of WPI as per revised base has pushed up real GDP considerably during recent years.
- The exclusion of excise duty from the computation of WPI has also partly contributed to lower WPI inflation during recent years, which in turn has pushed real GDP up to some extent.
What could be done?
- A better way to estimate GDP accurately is to deflate input and output prices through separate indices, popularly known as double deflation.
- When output prices move relatively faster than the input prices, the single deflation method overestimates GDP/GVA and vice versa.
- In order to ensure accuracy, it is high time to discard the single deflation method to estimate GDP/GVA by using WPI as a deflator.