• The government has constituted an 18-member working group, under the chairmanship of NITI Aayog Member Ramesh Chand, to revise the Wholesale Price Index (WPI) base year from 2011-12 to 2022-23.

• The revision of the base year helps in presenting a more realistic picture of the price situation in the country.

As per the Terms of Reference (ToR) of the group, it will:

i) Suggest the commodity basket of WPI and Producer Price Index (PPI) with the base year 2022-23 in the light of structural changes in the economy.

ii) Review the existing system of price collection and suggest changes for improvement.

iii) Decide on the computational methodology to be adopted for WPI/PPI.

iv) Examine the methodology for the compilation of PPI

v) Suggest further improvement in compilation and presentation and recommend a roadmap for switch over from WPI to PPI.

• The members of the group include representatives from the RBI, Department of Economic Affairs, Ministry of Statistics, Department of Agriculture, Department of Consumer Affairs, Ministry of Petroleum and Natural Gas; Soumya Kanti Ghosh, Chief Economist, SBI Group.

• WPI revision is a periodic exercise. 

• Two major indices are used for tracking price movement — Wholesale Price Index (WPI) and Consumer Price Index (CPI).

• Ever since the introduction of the WPI in 1942 with the base year 1939, seven revisions have taken place introducing new base years — 1952-53, 1961-62, 1970-71, 1981-82, 1993-94, 2004-05 and 2011-12.

• The current WPI base year 2011-12 series was launched in May 2017.

What is inflation?

• Inflation refers to the general increase in the prices of goods and services over time, leading to a reduction in the purchasing power of money.

• In simpler terms, when inflation rises without a corresponding increase in income, people can afford to buy fewer goods and services than before, or they may have to spend more money for the same items.

• A “rising” inflation rate indicates that the pace at which prices increase is accelerating. For instance, if inflation was 1 per cent in March, 2 per cent in April, 4 per cent in May, and 7 per cent in June, the inflation rate is increasing each month.

What is Wholesale Price Index (WPI)?

• The Wholesale Price Index (WPI) tracks the changes in the prices of goods that are traded in bulk between businesses. It focuses solely on goods (not services) and reflects the dynamics of supply and demand in sectors like industry, manufacturing, and construction.

• The WPI is published monthly by the Economic Adviser in the Ministry of Commerce and Industry.

• The month-over-month increase in the WPI is used to measure the level of wholesale inflation in the economy.

How is WPI calculated?

The WPI is calculated based on the wholesale prices of a selection of relevant commodities. These commodities are chosen based on their importance to the economy, ensuring that the WPI represents different sectors.

• Number of Commodities: 697 items.

• Base Year: 2011-12.

Major Components of WPI:

1) Primary Articles (22.62 per cent)

• Food Articles: Includes cereals (paddy, wheat), pulses, vegetables, fruits, milk, eggs, meat, fish, etc.

• Non-Food Articles: Includes oil seeds, minerals, crude petroleum.

2) Fuel & Power (13.15 per cent)

• Tracks price movements in petrol, diesel, and LPG.

3) Manufactured Goods (64.23 per cent)

• Includes textiles, apparel, paper, chemicals, cement, metals, etc.

• Also covers manufactured food products like sugar, tobacco, oils, and fats.

Headline vs Core Inflation:

• Headline Inflation: Includes the prices of all goods in the basket, including volatile items like food and fuel.

• Core Inflation: Excludes food and fuel items, providing a clearer view of underlying inflation trends since food and fuel prices often fluctuate significantly.

• While headline inflation is more relevant in developing countries like India, where food and fuel make up a large portion of the consumer basket, core inflation is less volatile and more suited for assessing long-term inflation trends.

WPI vs CPI (Consumer Price Index):

• WPI measures the wholesale price of goods, focusing on bulk transactions between businesses.

• CPI measures the average price that consumers pay for a basket of goods and services, including services like healthcare, education, and housing.

Why RBI shifted focus to CPI?

Following the recommendation of the Urjit Patel Committee in 2014, the Reserve Bank of India shifted its focus from WPI to CPI as the primary measure of inflation.

The key reasons for this shift are:

• CPI is more relevant to consumers since it tracks the cost of living at the consumer level, including services, while WPI focuses on wholesale prices.

• CPI helps the RBI control monetary policy more effectively because it reflects inflation that directly impacts consumers, allowing for better monitoring and intervention.

• The RBI uses CPI to set interest rates in India, with the goal of keeping inflation within a target range to maintain economic stability.

• Thus, CPI offers a clearer picture of inflation for households and provides the RBI with the tools to manage inflation through its monetary policy.

(The author is a trainer for Civil Services aspirants.)