Understand the terms CPI and WPI

by Pankhudi Dave Head Finance Manager

A crucial measure of the economy health is inflation. Increasing inflation not only makes goods and services expensive but also reduces the value of the domestic currency. The government is keeping a close eye on national inflation and enforcing policies to keep it within a manageable range. But how can inflation be measured? There is a consumer price index in the picture here.

A metric to measure inflation is the CPI index. It is determined by monitoring, over time, the shift in the prices of essential goods and services purchased by households. The index of consumer prices captures inflation at the retail level in a fixed range of products such as transportation, food, medical care, education, etc.

To understand the significance of CPI, it is necessary to understand the methodology behind it. A basket of goods and services forms the basic building block of the CPI index. The monitoring of the prices is started after the products in the basket are finalised.

India is a diverse nation, and because of supply-side inequalities, the price of a commodity will see a greater increase or decrease in a rural area than in an urban area. Suppose there is a scarcity of onions in the world, for example. The concept of demand-supply dictates that specific percentage points will increase the price of onions.

The price increase due to low output will be the same across the nation. However, due to the inefficiency of supply chains, some far-flung rural areas may see a higher price increase, which is aggravated when quantities decrease.

The wholesale price index is an essential predictor of the movement of prices in the commodity market. If you are a commodity broker or want to get into it, you will often come across the word, Wholesale Price Index or WPI, which measures the price of goods before it reaches to the retail level. Traders around the world will look at WPI to accurately guess the movements in commodity prices to base their trading choices.

So, what is the wholesale price index, and how does it help you make better decisions about investments? The definition suggests that a WPI is an inflation measure that monitors rates at the early stages of a transaction. The wholesale price index gives a notion of the average change in the price of bulk commodities at the wholesale level, which means the price at the producers and traders' level.

The WPI index consists of prices of three broad categories — primary goods, fuel and electricity, and manufactured products. It calculates the products selected and publishes the indexes on which the market is focused. Because it is an indicator of inflation, it is measured against the base year as a percentage.