TWO INFLATIONS – ONE HEADING NORTH, ANOTHER SOUTH

about 2 months ago
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Common sense says that when retail inflation or CPI is high, the price in the Wholesale market (WPI) has to also be high as that’s where good come from, isn’t it?

But in economics, common sense does not always work. What we have observed most of the times is that they both move in completely opposite direction. Like the CPI for the past few months has been on the rise while WPI has been in the negative.

CPI for July soared to almost 7% while WPI continued to contract for the fourth month in a row to -0.58%.

The big question which vexes all – why this huge difference between the CPI and WPI? Well, looking at things from an economic perspective, WPI is the measure of price of manufactured goods but does not measure services. It was originally supposed to measure the price at the factory gate but it is now more a measure of prices at the wholesale mandis. It includes a basket of 676 commodities, covering onions to chemicals and capital equipments. CPI tracks retail prices paid by consumers for finished products. There is a major difference between the WPI and the CPI as the prices differ due to subsidies, sales tax, excise duties, distribution costs.

This apart – the biggest reason is the food basket. In the WPI, food items have a low weightage at 24.38% while it is over 45% in CPI. And the consistent rise in CPI is directly on account of rising prices of food, mainly fruits and vegetables. So, when food prices are soaring, naturally CPI is directly impacted while WPI not so much, though it has been showing a slight increase.

At the same time, a negative WPI indicates weaker pricing power of companies, which in today’s time is more on account of supply chain disruptions. The lower capacity utilization by factories indicates structural issues coming to the fore on account of the pandemic.

Some economists also blame it on the methodology. Both, CPI as well as WPI are calculated using price data collected from various centers.

CPI and WPI, both use the Base year as 2012 though method of collection is different. CPI collects data from 1114 urban markets and selected 1181 villages through personal visits by field staff of Field Operations Division of NSO, MoSPI on a weekly roster. WPI data is collected from selected institutional sources and industrial establishments spread across the country online through web-based portal maintained by the National Informatics Centre (NIC).

But coming back to brass tacks, does this divergence matter to the common man or the scores of house helps and drivers, gardeners and the likes across India? Not at all! For them CPI or WPI holds no relevance – for them and us, the only thing that hurts is the high cost of living. No amount of FDI or cutting corporate tax or persistent attempts to appease the stock markets will help – hope the Govt realises this simple truth.

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