The inflation numbers for September 2023 present a puzzling picture of a falling Consumer Price Index (CPI) alongside a rising Wholesale Price Index (WPI), though the latter continues to be in the negative zone. Thus India’s headline inflation—the combined CPI that looks at rural and urban prices—fell from 6.83 percent in August to 5.02 percent in September. The WPI, on the other hand, rose from -1.23 per cent in July to -0.52 per cent in August, and further to -0.26 per cent in September. What can one make of this puzzle with differing WPI and CPI, and how should one interpret the current movements in each price index?
Price indices, be it CPI or WPI, are used to measure price changes of very different sets of transactions at various levels in the supply chain as goods and services move from manufacturers or producers to retailers and then to customers. Thus, the CPI reflects the change in retail prices of goods and services typically purchased by households and affects consumers. The WPI reflects changes in the wholesale prices of commodities sold in bulk at the first stage of the transaction, impacting manufacturers. So, the CPI is taken as a cost of living index while the WPI is a rough indicator of what is happening to producer prices in the country.
The CPI-WPI difference in India can be attributed to the different baskets of items in each index and the relative weights of these items. Manufacturing inputs and intermediate goods constitute the bulk of the WPI, while food and beverages account for the highest weightage in the CPI. The two indices also differ in including non-tradable services such as health, education, recreation, and amusement. While the WPI excludes services completely, services comprise 28.32 per cent of the CPI. Similarly, the weights of major petroleum products such as petroleum and high-speed diesel also vary significantly.
The weights of items in both indices are calculated differently. Thus, the weights of items in the WPI are based on the production values. The weights of items in the CPI basket are based on the proportion that an average household spent on various items in the base year, the details of which are taken from the consumer expenditure survey conducted in the base year. The WPI uses ex-factory prices for manufactured products, ex-mine prices for mining, and mandi-level prices for agricultural products. Ex-factory prices are those at which the product is ready for collection at the manufacturing or mining site and do not include costs incurred for transportation, excise, customs duties, among others. In contrast, the CPI uses consumer retail prices collected from various markets.
The difference between the CPI and WPI can be explained by the different factors that each is vulnerable to. Think of El Niño or similar climate phenomena causing lower monsoons in India and affecting India’s agricultural sector, where more than 40 per cent of the net sown area depends on monsoon rains. The weightage of food in the CPI basket is 46 per cent, compared to food articles and manufactured food products having a combined weight of 24.4 per cent in the WPI basket. With this difference in the food weights, monsoon failure would affect food prices and get transmitted to the rest of the economy, causing mainly the CPI to rise. The WPI would remain relatively unaffected.
Consider, for instance, inflation in the TOP vegetables—tomatoes, onions and potatoes—accounting for one-third of the CPI vegetable category. A research report held the sharp 9.1 per cent inflation in the TOP category over 2020-2023 responsible for vegetable inflation rising to 5.7 per cent over the same period. Vegetable inflation remained in double digits from March to September 2022, averaging 15 per cent. Much of the difference between the CPI and WPI can thus be explained by the differential impact of food inflation on the respective indices due to the different weights and prices used for calculation. Vegetable inflation in the WPI in September 2023 is -15 per cent, compared to 3.39 per cent in the CPI.
On the other hand, any rise in the crude oil price, such as that driven by geopolitical uncertainties in the Middle East, would impact both CPI and WPI but would be reflected more in the WPI, where the weightage for fuel and power is almost twice that in the CPI. The WPI is also highly vulnerable to changes in global commodity prices, given that the weightage of manufactured goods and basic minerals is almost 65 per cent.
Also read: Taming the big fat food inflation
What would a negative WPI imply? The WPI is used as a deflator for many sectors of the economy to estimate the gross domestic product. Business contracts are indexed to the WPI, while global investors also track WPI as one of the key macro indicators for their investment decisions.
A negative WPI, as seen currently, represents a deflation of the average prices of manufacturing inputs and may disincentivise the manufacturers of such products. At the same time, users of these intermediate inputs are likely to gain higher margins. The net impact on manufacturing and, thereby, industrial production, will depend on the relative strength of the two indices even as we seek to “Make in India”.
However, with crude oil expected to trade at $90.93 for a barrel by the end of this quarter, the WPI is likely to rise in the coming months. This increase will spill over to the retail level after a lag.
The Reserve Bank of India will need to monitor both the WPI and CPI to manage business confidence, even as it seeks to use monetary policy to curb inflation-led misery for the end consumer.
Tulsi Jayakumar
Professor, finance and economics, and Executive Director, Centre for Family Business and Entrepreneurship at Bhavan’s SPJIMR
(tulsi.jayakumar@spjimr.org)
(Views are personal)