Why the CPI inflation rate differ from the WPI rate?

Often we see that the CPI inflation rate and WPI inflation rate shows notable difference. Most times, the CPI inflation rate will be much higher than the WPI rates.

Main reason for the difference in rates is due to the difference in nature of the commodities included in the baskets and the weights given to them. First, food items have a larger weight of nearly 50% in the CPI; whereas its weight is just around 25 per cent in WPI (including food items under manufactured category).  On the other hand manufactured products have a high share of 65 per cent in WPI.

Remember that in India, basic or primary commodities like food and basic goods undergoes price rise first. Then this price rise often but not always spread into the rest of the economy.In the recent past, , inflation was driven by food prices. 

The CPI therefore is more sensitive to changes in prices of food items and especially primary products. Consumer goods are the first point where price ris reaches. The inflation appeared in food products may be seasonal and short term they may not spread into the remaining manufactured items. Hence, the retail or CPI inflation is much higher than the WPI figures. 

Second, services are not covered under WPI while they are well covered under CPIs. Consequently, service price inflation has a greater influence on CPIs.

Third cause for this difference is the source of price quotations. CPI data are collected from the retailers which often indicate larger price fluctuations compared to wholesale prices. Because of this, CPI inflation is known as retail inflation.

 Table 1: Commodity basket and weights under WPI

Commodity/basket

Percentage weight

1. Primary Articles

20

Food

14

Non-food

4

Minerals

2

2. Fuel and Power

15

3. Manufactured Products

65

Table: 2 Product groups and weights under the combined CPI

Product Group

Weight

Food, beverages and tobacco

49.71

Fuel and light

9.49

Housing

9.77

Clothing, bedding and footwear

4.73

Miscellaneous ( mostly services)

26.31

Source: CSO Manual 2011, http://mospi.nic.in/mospi_new/upload/brochure

The CPI thus reflects the inflation level for consumers because of the consumer items it considers and the weights given to each item is in accordance with the consumption pattern of consumers. For this reason, most central banks including in India, the CPI is used as the representative inflation index.