Why the CPI inflation rate differ from the WPI rate?
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, primary commodities have a higher weight under the CPI whereas primary commodities have a low weight of 22.6% under WPI. In the CPI, primary commodities are scattered among several groups.

Food items have a larger weight of nearly 39% in the CPI; whereas its weight is just around 24.4 per cent in WPI (including food items under manufactured category).  On the other hand manufactured products have a high share of 64.23 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 rise 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: Product groups and weights under the combined CPI for 2012 base year series

Product Group

Weight

Food, beverages and tobacco

45.86

Pan, tobacco and intoxicants

2.38

Clothing, bedding and footwear

6.53

Housing

10.07

Fuel and light

6.84

Miscellaneous

28.32

Total

100

Source: CSO Consumer Price Index, Changes in the Revised Series, 2015

Commodity Groups under WPI: 2011-12 base year

Commodity Group

Weight (%)

Primary Articles

22.62

Fuel and Power

13.15

Manufactured Products

64.23

WPI Food Price Index

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.