WPI inflation and its implications

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WPI inflation and its implications

  • Wholesale inflation, based on the Wholesale Price Index, jumped to 14.23 per cent in November from 12.54 per cent in October (on a year-on-year basis)
  • This is the highest level of wholesale inflation in the 2011-12 series and eighth consecutive month in which it has stayed at a double-digit level.
  • This comes after the retail inflation print for November, released Monday, had shown a spike to a three-month high of 4.91 per cent despite a cut in excise duty on fuels

About Wholesale Price Index (WPI):

  • It represents the price of a basket of wholesale goods.
  • It is for the price of goods that are traded between corporations and does not concentrate on goods purchased by the consumers.
  • Goods and commodities covered under it: minerals, machinery, basic metals, etc.
  • Its main objective is to monitor price drifts that reflect demand and supply in manufacturing, construction and industry.
  • It is helpful in assessing macroeconomic as well as microeconomic conditions of an economy.
  • WPI is used to calculate the inflation rates.
  • This index is released by the Office of Economic Advisor ,the Ministry of Commerce and Industry.
  • Base year for WPI is 2011-12

About Consumer Price Index (CPI):

  • It is a measure that assesses the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care, purchased by households.
  • This index Indicates the average change in the prices of commodities at the retail level.
  • It is released by the Central Statistics Office (Ministry of Statistics and Programme Implementation) & Labour Bureau
  • Goods and services covered under it: Education, communication, transportation, recreation, apparel, foods and beverages, housing and medical care
  • Base year for CPI is 2012

Rising inflationary trend:

  • Inflation rates at both wholesale and retail levels are showing a rising trend.
  • The WPI grew 12.54 per cent during October, while the WPI for September was revised to 11.80 per cent from 10.66 per cent.
  • The WPI inflation rate in November 2020 was at 2.29 per cent.
  • The retail inflation print for October was at 4.48 per cent and 6.93 per cent in November 2020.
  • It is within the 4+/-2 per cent targeted range of the Reserve Bank of India.
  • Both core and manufacturing inflation stayed over 11 per cent for the fifth successive month at wholesale level.
  • The surge in the core index with a perceptible uptick across the sub-groups shows the pervasive commodity and input price pressures.

Reason for rising WPI inflation:

  • It is primarily due to rise in food prices especially of vegetables, and minerals and petroleum products
  • A sharp surge in primary articles inflation which doubled to 10.34 per cent in November 2021 from 5.20 per cent in October 2021 was mainly responsible for taking the wholesale inflation to record levels.
  • Fuel is a major input into transportation cost, higher fuel prices push up the distribution cost further.
  • Consequently, leading to double-digits inflation in seven groups namely, textiles, paper & chemicals, rubber & plastics, basic metals, fabricated metals and furniture for six successive months

Gap between WPI and CPI inflation:

  • WPI is not a policy tool but the surge in it is a cause of worry.
  • While the CPI-based retail inflation is a more widely tracked policy tool
  • CPI only tracks basic prices devoid of transportation cost, taxes and the retail margin etc. * * WPI pertains to only goods, not services and it basically captures the average movement of wholesale prices of goods
  • WPI is primarily used as a GDP deflator (the ratio of the value of goods an economy produces in a particular year at current prices to that of prices that prevailed during the base year).

Future trends in inflation:

  • The period of low inflation is over.
  • Inflation of commodities such as health, fuel and light, and transport and communications, has turned structural and supply shortages are further aiding higher inflation, which cannot be termed as transitory
  • Relief in fuel prices is unlikely as due to increased transportation and logistics costs at international levels
  • Input price pressures and supply-side shortages are pushing up prices at the consumer level and going ahead may further impact demand.
  • The risks from the new Omicron variant are also expected to create upside risks for global commodity prices.
  • Recent pro-active supply-side interventions by the government continue to restrain the pass-through of elevated international edible oil prices to domestic retail inflation.
  • According to the RBI, slack in the economy is muting the pass-through of rising input costs to output prices
  • It has projected CPI inflation at 5.3 per cent for 2021-22 and at 5.1 per cent in Q3; 5.7 per cent in Q4 and at 5 per cent for the first quarter of financial year 2022-23.