India's Wholesale Price Index (WPI) rose to 9.68 percent in May, the highest print in at least 44 months. Unarguably, the biggest drivers of price were oil and gas, chemical products and basic metals. Rising energy costs raised input prices across sectors, contributing to broader producer price pressures. For instance, inflation in crude petroleum and natural gas accelerated to 61.51 percent, while mineral oil prices jumped 49.82 percent. With global crude prices correcting closer to $80 a barrel after the latest deal to end the Gulf war, it will be interesting to see how soon retail and wholesale inflation soften. Meanwhile, the May data marks the first release under the revised WPI series with the 2022-23 base and an expanded basket of 957 items.
Importantly, India also launched a comprehensive Producer Price Index (PPI), which is set to replace the WPI in 2031. The reason for the transition is clear: the WPI measures average price changes of goods at the wholesale level, but excludes services such as healthcare, education and telecom despite India being a services-driven economy.
It remains a key economic indicator and is used extensively in price escalation clauses in long-term contracts, apart from serving as the deflator to calculate real GDP. On the other hand, the PPI captures prices that producers receive and pay, and hence is an early indicator of supply-side pressures. What makes PPI better is that, unlike WPI, it excludes indirect taxes. When taxes rise, wholesale inflation often firms up even if the cost of production remains unchanged. Given that PPI excludes taxes, trade margins and transportation costs, it is the cleanest indicator of price changes at the factory level. Another key difference is that the WPI includes imported goods, while the PPI measures only domestic production.
Above all, the PPI provides a more complete picture as it tracks price changes in banking, telecom, aviation and other services. So if used as a GDP deflator, it can enhance the accuracy of national income estimates. Which is why, advanced economies use the PPI as the principal measure of producer-level inflation and this shift will align India with global statistical practices. That said, building timely, reliable and accurate producer-level price databases is a complex task, while measuring price changes in the services sector is more challenging than measuring goods prices.