Wholesale Price Index

The Wholesale Price Index (WPI) is the price of a representative basket of wholesale goods. Some countries (like India and The Philippines) use WPI changes as a central measure of inflation. However, India and theUnited States now report a producer price index instead. The Wholesale Price Indexfocuses on the price of goods traded between corporations, rather than goods bought by consumers. The purpose of the WPI is to monitor price movements that reflectsupply and demand in industry, manufacturing and construction. This helps in analysing both macroeconomic andmicroeconomic conditions. Wholesale price index measures inflation at each stage of production while consumer price index measures inflation only at the final stage of production. Indian government constructed its present WPI way back in 1993-94 (1993-94 series replacing1981-82 bases) by making a basket of 435 commodities (and not prices of services) whose pricerise and fall tells us about inflation. Out of these 435 items, primary articles (food items and non-food items like jute etc.) contributes 98 items, fuel, power, light and lubricants 19 items andmanufactured products 318 items. Primary article has assigned a weight of 22.02 per cent, fuel,power, light and lubricants has been given weight of 14.23 per cent while manufactured productshas been given a weight of highest 63.75 per cent. The WPI in its role as a guide to policy formulation has several critical limitations. The important limitations relate to (a) non-inclusion of services (b) following a fixed weighting scheme while the economy is undergoing major structural changes, and (c) use of gross transactions data rather than data on final purchases. Out of 435 commodities, more than 100 commodities are ceased to be important fromconsumer point of view so the price changes in those 100 commodities does not really affectthe Indian consumers. The importance of service sector cannot be ruled out in India but service sector are notduly accounted in WPI. Service sector like health and education are important as consumersare increasingly spending more money on these items.

There is a huge difference between the provisional and final index figure and it is sometimesmore than 100 basis points difference between provisional figure and final figure. So for theweek ended April 12, 2008, the provisional figure of inflation was 7.33, which were revisedas final inflation figure of 7.95 so there was an upward difference of huge 62 basis points. Insuch a sensitive data an error margin of 62-100 basis points does not seem a healthy error.

Calculation of Wholesale Price Index

The following methods are used to compute the WPI: Laspeyres Formula (relative method): It is the weighted arithmetic mean based on the fixed value-based weightsfor the base period. Ten-Day Price Index: Under this method, sample prices with high intramonth fluctuations are selected andsurveyed every ten days through phone. Utilizing the data retrieved by this procedure and with the assumptionthat other non-surveyed "sample prices" remain unchanged, a "ten-day price index" is compiled and released. Calculation Method: Monthly price indexes are compiled by calculating the simple arithmetic mean of three tendaysample prices in the month.

Why is India not switching over to the CPI method of calculating inflation?
Finance ministry officials point out that there are many intricate problems fromshifting from WPI to CPI model. First of all, they say, in India, there are four different types of CPI indices, and thatmakes switching over to the Index from WPI fairly 'risky and unwieldy.' The four CPIseries are: CPI Industrial Workers; CPI Urban Non-Manual Employees; CPIAgricultural labourers; and CPI Rural labour. Secondly, officials say the CPI cannot be used in India because there is too much ofa lag in reporting CPI numbers. In fact, as of May 21, the latest CPI number reportedis for March 2006. The WPI is published on a weekly basis and the CPI, on a monthly basis.And in India, inflation is calculated on a weekly basis.