Typically, we use Consumer Price Index (CPI) and Wholesale Price Index (WPI) to determine the level of inflation in an economy. The wholesale Price Index assists in measuring the price change incurred on the bulk sales of items. However, the Consumer Price Index measures the variations in the general price of a particular group of consumer products.
Indexation can be described as changing the money-related proceeds, such as interest taxes, dividends, earnings, and more. We use the aid of price indexes to offset fluctuations in the general price level and maintain consumers' purchasing ability. Price Index refers to the number of an index that reflects the extent to which a particular commodity's price has changed compared to the previous year. Read this article to understand the distinctions between the Wholesale Price Index (WPI) and Consumer Price Index (CPI).
Did you know?
The world's biggest country in terms of wholesale price index is India, with a 165.9 index in 2021. Pakistan and Austria are also on the list.
What Is the Consumer Price Index?
Let's start by understanding what CPI and WPI are. The Consumer price index or CPI is a measure of market changes in prices over time. It is calculated as the average price of a basket of goods and services.
An index is a useful tool for tracking price changes, especially those related to food and clothing. In other words, if you look at the index, you can tell how much everything has increased in price.
There are several reasons why the Consumer Price Index may not be accurate for different population groups. The CPI for an urban area, for example, will reflect the urban population in an economy, but it won't show the rural population's status.
The index is only a conditional cost-of-living measure and does not account for social or environmental factors. The most important thing to remember when calculating the CPI is that it isn't a perfect measure of all aspects of life.
Also Read: Inflation and its Impact on the Economy
How to Calculate the Consumer Price Index?
Before we start knowing the major CPI and WPI differences, let's see the calculation process of the consumer price index. One of the simplest ways to calculate the consumer price index is by comparing the interest charged by a person in 2009 to that same individual in 2010. In this way, you can see how much the consumer's standard of living has risen or decreased.
However, the Consumer Price Index doesn't include the opportunity cost of renting a place compared to owning a home. This cost is called "opportunity cost" and should be included in the index.
- The index is calculated quarterly or monthly, concerning a base year. The base year is used to measure how much prices have changed from the base year.
- The Consumer Price Index is calculated using the prices of a market basket of goods and services in a given region. This price basket represents consumption expenditure in an economy.
- To calculate the index, you need to divide the price of a basket of goods in one year by the price of the same basket of goods in the base year. Then, divide this number by 100 to get the average price of a basket of goods in the base year.
Highlights of Consumer Price Index
- The Consumer Price Index is a statistical estimate of how much an average urban household spends on goods and services each year.
- CPI is used to monitor the cost of living and determine economic conditions.
- We can measure the rate of inflation and deflation using CPI.
- To compute the CPI, various sub-indices are created. Each of these sub-indices has a specific weight. These are derived from data gathered from sample household expenditure surveys. When these are combined, they represent the overall CPI of an economy.
- The CPI is based on the weighted average retail prices of eight categories of goods and services. Education, garments, communication, transportation, and medical care.
- The CPI reflects changes in prices on an individual level during inflation and measures overall inflation.
What Is the Wholesale Price Index?
Understanding WPI is also important before knowing the difference between WPI vs CPI. The Wholesale Price Index is the central measure of inflation in some countries, including the United States. The WPI measures changes in the wholesale prices of a representative basket of goods.
While some countries use the WPI as a central measure of inflation, others, like India, use the producer price index (PPI) instead. Nevertheless, the wholesale price index is a key part of the economy, so you should be familiar.
How to Calculate the Wholesale Price Index?
Generally, the WPI consists of industrial and agricultural goods. The Laspeyres formula is used for this calculation. If the index is rising at a slower rate than expected, prices have fallen. But if the WPI is falling, then the average wholesale prices will go down. It is a monthly measure of the change in prices. The WPI uses the total costs of goods in a base year, 100. Then, it compares the prices from another year to the base-year total, and the difference is written down as a percentage.
Highlights of Wholesale Price Index
- The WPI is very important in helping the government take necessary action against inflation.
- It is important to understand that the wholesale price index is not the same as the retail prices of these goods, so excessive wholesale price inflation can negatively impact the economy and household finances.
- The wholesale price index is used in monetary and fiscal policies. It helps to adjust economic time series.
- The WPI measures changes in prices in the first few production steps, while the PPI counts only the final products.
- It measures the price increases and decreases of goods in the primary market before reaching the retail sector.
- The WPI covers a much larger scale than the CPI, more targeted toward the retail market.
CPI vs WPI
- Only a few countries use WPI. On the other hand, CPI is very popular, and 157 countries use it.
- WPI covers 697 items. In contrast, CPI covers 448 items (Rural Basket), and 460 items (Urban Basket)
- The Consumer Price Index tracks the average change in the price of goods and services at the retail level. The WPI measures prices of goods sold by businesses, while the CPI measures the prices of goods purchased by consumers.
- While the Consumer Price Index measures consumer prices, the Wholesale Price Indicator (WPI) measures changes in the cost of goods and services.
- The Consumer Price Index is a more reliable indicator of overall inflation.
- The difference between the two indices lies in the number of commodities included.
- WPI is published by the Economic Advisor, while the Central Statistics Office publishes CPI.
- WPI covers only goods, while CPI covers both goods and services.
- Measurement of Inflation occurs at the first stage of the transaction in the case of WPI, while in CPI, it happens in the final stage of the transaction.
- In WPI, Manufacturers and wholesalers pay the price, while in CPI, only consumers pay.
- WPI focuses on the costs of goods traded between business houses, while CPI focuses on the costs of goods/services purchased by consumers.
Also Read: Economic Survey 2022: GDP to grow at 8-8.5% in FY23; See highlights here
Conclusion
The CPI and WPI are two different price indexes, but they are both important for monitoring inflation in a country. Inflation is an important indicator of economic policy, and both can be used to set the monetary rate. If one index is up, then the other is down. But it's difficult to determine which index is higher because WPI includes the prices of the items sold by wholesalers while CPI is based on prices purchased by consumers.
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