Definition and Concept
Wholesale Price Index (WPI) is an indicator of price movements of wholesale goods. It is used to calculate inflation.
It tracks prices of the goods before they reach the retail level or the consumers. In other words, WPI measures prices that manufacturers charge from the wholesalers or the wholesalers charge from retailers.
WPI must always refer to a base year. WPI is calculated at fixed time intervals (either monthly or yearly) and is derived from the prices of a chosen basket of goods, taken to represent the whole economy.
Calculation
The Wholesale Price Index (WPI) is calculated tracking the price changes of each item individually and then taking a weighted average of all these price movements. Laspeyres Formula is generally used to calculate WPI. Now just deduct the WPI at the end of a year from that of the beginning of a year, and take the relative value to get the rate of increase in the price level during the year.
WPI vs. CPI
In contrast to WPI, CPI (Consumer Price Index) traces and measures the changes in the retail price movements. It concerns the prices that the end consumers pay to purchase a product. It shows whether commodities are becoming cheaper or dearer with time.
India’s current Scenario
The Office of Economic Advisor to the Ministry of Commerce and Industry of Govt. of India is in charge of calculating the WPI. 676 items along with their relative weights comprise the WPI basket of goods. Some of the important items in the basket are:
Primary Items
- Food items
- Non-food items
Manufactured Goods
- Textile
- Chemical Products
- Paper products
- Metal and alloy
- Machinery and tools
- Transport, equipment and parts
Fuel and Power
- Electricity
- Coal
- Crude oil
After recovering from the damages of global economic crisis, 2010-11 has shown relatively stable price movements and currently this is the base year to calculate WPI in India.
Since November 2014, the WPI in India is showing a downward trend. Despite the rise of the food prices, the continuous downward pressure on the price of the oil has taken wholesale inflation to a negative territory. On a monthly basis, WPI decreased by around 1.00% from the last quarter of 2015 to the first quarter of 2016.
Global Scenario
Different countries of the world use this indicator to track price movements. However, the number and type of commodities included to calculating WPIs vary widely. In large industrial countries like the United States of America and the United Kingdom, usually thousands of commodities are considered.
With time, WPI is becoming less important in many countries. The USA, for example, currently uses Product Price Index (PPI) as the prime indicator of price movements. Also in China, Singapore and France, CPI has replaced WPI.
Drawbacks
- WPI gives less weight to food items than CPI does.
- The service sector is not taken into account.
- Unorganized sector is not counted.
Importance
Still, Wholesale Price Index (WPI) is an important economic parameter. Besides signaling the price trend, this indicator gives clues to devise monetary and fiscal policies.
