Wholesale Price Index (WPI): Meaning, Calculation and Limitations

The Wholesale Price Index (WPI) is one of the key indicators used to track inflation in an economy. While the Consumer Price Index (CPI) reflects the retail prices paid by consumers, WPI focuses on the prices of goods at the wholesale level. Understanding WPI is crucial for economists, policymakers, and businesses as it helps in measuring changes in the cost of goods before they reach the end consumer.

What is the Wholesale Price Index (WPI)?

The Wholesale Price Index (WPI) measures the average change in the prices of goods at the wholesale level over time. It tracks prices of goods sold in bulk and traded between businesses or between businesses and government entities. WPI is used to monitor inflation in the production and wholesale sectors of the economy.

What is WPI? In simple terms, it is an index that reflects the price movement of goods in the wholesale market. It excludes services and only includes commodities such as food items, fuel, and manufactured products.

How the Wholesale Price Index Works?

WPI helps understand how the prices of goods are changing at the early stages of the supply chain. If the WPI rises, it means wholesale prices are increasing, signalling inflation. If it falls, it indicates deflation or slower price growth.

WPI inflation refers to the percentage change in the WPI compared to a previous period (usually year-on-year). For example, if the WPI increases from 120 to 126 over a year, the WPI inflation rate is 5%.

Governments and businesses use this data to make decisions related to pricing, policy-making, and supply chain planning.

Components of Wholesale Price Index (WPI)

The WPI components in India are broadly classified into three categories:

• Primary Articles (like food items, minerals, and crude petroleum): These make up around 22.6% of the total WPI.

• Fuel and Power (like petrol, diesel, and electricity): This category has a weightage of about 13.2%.

• Manufactured Products (such as textiles, chemicals, metals, etc.): This is the largest component, contributing nearly 64.2%.

Each of these components has a specific weight, and the final WPI value is derived from the weighted average of price changes in these categories.

How is Wholesale Price Index Calculated?

So, how is the Wholesale Price Index calculated?

WPI is calculated using the Laspeyres formula, which is a weighted average of price relatives. Here’s a simplified version of the formula:

India currently uses the base year 2011-12 with an assigned value of 100 for calculating WPI. The Office of the Economic Adviser (OEA) under the Ministry of Commerce and Industry publishes the WPI.

The data for WPI is collected every month from across the country, covering over 700 items.

Example:

Let’s say we have three commodities in the WPI basket:

Numerator (Current Price × Weight):
(25 × 0.4) + (72 × 0.3) + (110 × 0.3) = 10 + 21.6 + 33 = 64.6

Denominator (Base Year Price × Weight):
(20 × 0.4) + (60 × 0.3) + (100 × 0.3) = 8 + 18 + 30 = 56

Now plug into the formula:

WPI = (64.6 / 56) × 100 = 115.36

So, the Wholesale Price Index = 115.36, meaning prices have increased by 15.36% compared to the base year.

Importance of the Wholesale Price Index

WPI plays a vital role in the economic framework of the country. Here's why it’s important:

• Monetary Policy: The Reserve Bank of India (RBI) uses WPI data, along with CPI, to decide interest rates and control inflation.

• Business Planning: Companies track WPI to plan production, pricing, and inventory.

• Inflation Trend Analysis: It gives early signals of inflationary trends before prices impact consumers.

• Contract Price Adjustments: Some contracts use WPI-linked clauses for revising prices.

• Pricing of Commodity Future Contracts: Traders use WPI numbers to evaluate the pricing of commodity future contracts as WPI is a macro economic indicator.

Wholesale Price Index vs Consumer Price Index: What’s the Difference?

The debate of WPI vs. CPI is common when talking about inflation.

While WPI inflation indicates price movement at the production level, CPI better reflects the cost of living.

Limitations of the WPI

Despite being a valuable tool, WPI has some limitations:

• Excludes Services: WPI does not include services like healthcare, education, and transport, which are a major part of consumer spending.

• Does Not Reflect Consumer Prices: WPI does not always align with what consumers pay, as it reflects pre-retail prices.

• Lag in Data Collection: Monthly updates may not reflect real-time market changes.

• Outdated Weightage: The weights used in WPI may not always represent the current market structure if not revised regularly.

• Less Useful for Consumers: For households, CPI is a more relevant measure as it includes everyday expenses.

Conclusion

The Wholesale Price Index (WPI) is a key indicator that measures inflation at the wholesale level. It is useful for understanding price trends in goods before they reach the consumer. WPI helps businesses, government, and financial institutions in planning and decision-making. However, it also has its limitations, especially when it comes to capturing service inflation or directly reflecting consumer experience. To get a complete picture of inflation, WPI should be studied alongside CPI.