Wholesale Price Index (WPI) – Indian Economy Notes

Definition: The Wholesale Price Index (WPI) reflects the cost of goods at the wholesale level, indicating the prices of items traded in large quantities between businesses rather than individual consumers. It serves as a metric for gauging inflation in certain economies.

Description: In India, the Wholesale Price Index holds significant importance as a key indicator of inflation. Policy decisions related to fiscal and monetary matters in the country are notably influenced by fluctuations in WPI. In contrast, the United States relies on the Producer Price Index (PPI) to gauge inflation.

Wholesale Price Index offers a straightforward and convenient approach to calculating inflation. The variance in WPI values at the start and end of a given year determines the inflation rate. The percentage rise in WPI over the course of a year provides the corresponding inflation rate for that period.

Importance of WPI

In a dynamic world, prices do not remain constant.
The inflation rate calculated on the basis of the movement of the Wholesale Price Index (WPI) is an important measure to monitor the dynamic movement of prices.
Since WPI comprehensively captures price movements, Government, banks, industry, and business circles widely use it.
Government and financial authorities frequently associate significant monetary and fiscal policy changes with WPI movements.
Similarly, the movement of WPI serves as an influential determinant, in the formulation of trade, fiscal and other economic policies by the Government of India.
The WPI indices are also used for the purpose of escalation clauses in the supply of raw materials, machinery and construction work.
WPI is used as a deflator of various nominal macroeconomic variables, including Gross Domestic Product (GDP).

Formula of Wholesale Price Index (WPI)

The Laspeyres formula calculates WPI, measuring the change in the cost of purchasing the same basket of items in the current period as was purchased in a specified earlier period.

Example:

Assume that the cost of products is ₹4,500 in the current year (2015). To determine the price change, consider 2010 as the Base Year. The base year’s total cost of goods is ₹1,000. Calculate the WPI.

Solution:

WPI= \frac{4,500}{1,000}\times{100}

WPI= 450

The difference between the current year’s WPI and the base year’s WPI is 350 (since the base year’s WPI is regarded as being 100 on the scale).

Also, the WPI for the current year is 350%(2015).

Latest News on Wholesale Price Index (WPI):

In April, India witnessed a notable decline in Wholesale Price Index (WPI)- based inflation, reaching a 34-month low at -0.92%, in contrast to the 1.34% recorded in March 2023.

Data from the Commerce and Industry Ministry highlights price contractions across various sectors, including beverages, tobacco, apparel, leather, pharmaceuticals, cement, chemicals, textiles, manufactured food products, fats, basic metals, and rubber goods.

Difference between WPI and CPI

The below table illustrates the differences between Wholesale Price Index and Consumer Price Index:

Context	WPI	CPI
Definition	Amounts to the average change in prices of commodities at the wholesale level.	Indicates the average change in the prices of commodities at the retail level.
Publishing office	Office of Economic Advisor (Ministry of Commerce & Industry)	Central Statistics Office (Ministry of Statistics and Programme Implementation) & Labour Bureau
Commodities	Goods only	Goods and Services both
Inflation Measurement	First stage of a transaction	Final stage of a transaction
Prices paid by	Manufacturers and wholesalers	Consumers
Types of Commodities covered	Manufacturing inputs and intermediate goods like minerals, machinery basic metals, etc.	Education, communication, transportation, recreation, apparel, foods and beverages, housing and medical care

Merits of Wholesale Price Index

Various advantages of the Wholesale Price Index are as follows:

It reflects the overall growth or decline of an economy, and one can uncover the causes by conducting micro-level analysis.
Most nations base their 5-year plans on inflation rates determined using the WPI.
It assists businesses in developing budgets that account for potential inflation.
The government can develop measures to enhance unproductive sectors and gain knowledge of different sectors to concentrate on and grow upon by comparing the products of various industries.
Industries can evaluate and compare their performance to that of other products and adopt industry-wide actions to develop and advance.

Demerits of the Wholesale Price Index

Various disadvantages of the Wholesale Price Index are as follows:

WPI merely takes into account the effects of a small sample of the products that make up the whole population of goods. There is always a risk in doing business.
The weighted average-based inflation calculation may not be accurate because it represents the population as a whole.
Various nations calculate the WPI using different goods, making it challenging to always compare it to other nations.
It is not a suitable standard for nations where the service sector plays a central role.