The Office of the Economic Adviser, under the Department for Promotion of Industry and Internal Trade, has recently publicised the Wholesale Price Index (WPI) for June 2021. The key findings reveal an apparent high wholesale price inflation rate of 12.07%, following the record high of 12.94% in May 2021.
The Root Causes of Inflation
The elevated rate of inflation in June was primarily due to a low base effect. The ‘base effect’ is a term used to describe the impact that selecting different reference points for comparison between two data sets has on the result. Alongside this, rising prices of mineral oils such as petrol, diesel, naphtha, and furnace oil, as well as increased costs of manufactured products like basic metal, food products, and chemical products compared to the same period last year, contributed significantly to the soaring inflation rates.
Impact on the Retail Sector
Retail inflation, based on the Consumer Price Index (CPI), stood at 6.26% in June 2021. There are concerns that the high wholesale price inflation could potentially spill over into retail inflation levels, leading to uneasiness in monetary policy. Monetary policy embodies the management of money supply and interest rates enacted by the central bank to achieve macroeconomic objectives like controlling inflation, promoting growth, and ensuring liquidity.
Understanding Wholesale Price Index (WPI)
The WPI measures price fluctuations of goods sold and traded in bulk by wholesale businesses. It is published by the Office of Economic Adviser, Ministry of Commerce and Industry and is the most common inflation indicator in India. Despite its widespread use, a significant criticism is that consumers do not buy products at wholesale prices. The base year for the All-India WPI was updated from 2004-05 to 2011-12 in 2017.
Understanding Consumer Price Index (CPI)
Unlike WPI, the CPI captures price changes from the consumer’s perspective. It is released by the National Statistical Office (NSO) and calculates the difference in prices of commodities and services such as food, medical care, education, electronics, etc., that Indian consumers purchase. The base year for CPI calculation is usually 2012, but for Industrial Workers (CPI-IW), it’s 2016. Monetary Policy Committee (MPC) uses the CPI data to regulate inflation within range 4+/-2%. In April 2014, the Reserve Bank of India adopted the CPI as their key measure of inflation.
Difference between WPI and CPI
While WPI gauges inflation at the producer level, CPI measures price level changes at the consumer end. Unlike WPI, CPI also takes into account changes in the prices of services.
Defining Inflation
Inflation indicates an overall increase in the prices of common goods and services, affecting daily life including food, clothing, housing, transport, recreation, etc. A measure of change in average price, inflation represents a decrease in the purchasing power of a country’s currency, which could potentially slow down economic growth. However, a moderate inflation level is needed to foster production.
Core Inflation
Not inclusive of costs associated with the food and energy sectors, core inflation is essentially the change in cost of other goods and services. This measurement of inflation excludes these sectors due to their significantly fluctuating prices.
