Approach:

1. 1. Introduction: Define and briefly explain WPI ,CPI based inflation targeting.
  2. Body: Briefly mention the differences between WPI & CPI based inflation. Mention the limitations of WPI based inflation. How the limitations imposed by WPI based inflation can be overcome by PPI based inflation.
  3. Conclusion: Conclude by focusing on the impact of PPI based inflation on statistical computing and Indian Economy.

Ans: Wholesale Price Index measures the changes in the prices of goods sold and traded in bulk by wholesale businesses to other businesses. Consumer Price Index measures price changes from the perspective of a retail buyer. The Monetary Policy Committee (MPC) uses CPI data to control inflation. In April 2014, the Reserve Bank of India (RBI) had adopted the CPI as its key measure of inflation.

Differences between WPI and CPI

Wholesale Price Index measures the changes in the prices of goods sold and traded in bulk by wholesale businesses to other businesses. It is published by the Office of Economic Adviser, Ministry of Commerce and Industry. Base year of All-India WPI has been revised from 2004-05 to 2011-12 in 2017.

Consumer Price Index measures price changes from the perspective of a retail buyer. It is released by the National Statistical Office(NSO).The CPI calculates the difference in the price of commodities and services such as food, medical care, education, electronics etc, which Indian consumers buy for use. The CPI has several sub-groups including food and beverages, fuel and light, housing and clothing, bedding and footwear. Base Year for CPI is 2012. The Monetary Policy Committee (MPC) uses CPI data to control inflation. In April 2014, the Reserve Bank of India (RBI) had adopted the CPI as its key measure of inflation.

Limitations of WPI based inflation:

WPI merely takes into account the effects of a small sample of the products that make up the whole population of goods. There is always a risk in doing business.
The weighted average-based inflation calculation may not be accurate because it represents the population as a whole.
The WPI is calculated using various goods by various nations. As a result, it cannot always be compared to other nations.
It is not a suitable standard for nations where the service sector plays a central role.

Producer Price Index (PPI) based inflation:

The Producer Price Index (PPI) is an index that measure the average price change of goods and services. It can be calculated either when the goods leave the place of production or as they enter the production process. In the case where the goods leave the production place, it is known as Output PPI. Similarly Input PPI is when the goods enter the production process. Significance:

PPI is used as a measure if inflation and deflation.
To calculate escalator clauses in private contracts based on the prices of key inputs.
An escalator clause is a contract provision that allows in the automatic increase of agreed upon wages/prices if certain conditions change while contract is still intact.
Acts as an comparison of input and output cost.

PPI overcoming limitations of WPI

PPI measures the average price change received by the producer excluding the indirect taxes, whereas, WPI represents the price change of a basket of goods and includes some taxes levied. The distribution costs are also considered in WPI.
PPI reflects the price changes in both goods and services, whereas, WPI does not reflect the price changes in services.

The Wholesale Price Index counts goods only.

PPI gives a clear picture of inflation in an economy, while WPI It does not reflect inflation in an economy.
PPI also removes multiple counting bias inherent in WPI. The shedding of additional costs on products imposes by taxes and transportation makes it a more accurate gauge of price movements.

National Statistical Commission (NSC) is examining the working group report on the roadmap for introducing the PPI and their recommendations are awaited. PPI is considered conceptually more consistent with the System of National Accounts for use as deflator

Differences between WPI and CPI

Limitations of WPI based inflation:

WPI merely takes into account the effects of a small sample of the products that make up the whole population of goods. There is always a risk in doing business.

The weighted average-based inflation calculation may not be accurate because it represents the population as a whole.

The WPI is calculated using various goods by various nations. As a result, it cannot always be compared to other nations.

It is not a suitable standard for nations where the service sector plays a central role.

Producer Price Index (PPI) based inflation:

PPI is used as a measure if inflation and deflation.

To calculate escalator clauses in private contracts based on the prices of key inputs.

An escalator clause is a contract provision that allows in the automatic increase of agreed upon wages/prices if certain conditions change while contract is still intact.

Acts as an comparison of input and output cost.

PPI overcoming limitations of WPI

PPI measures the average price change received by the producer excluding the indirect taxes, whereas, WPI represents the price change of a basket of goods and includes some taxes levied. The distribution costs are also considered in WPI.

PPI reflects the price changes in both goods and services, whereas, WPI does not reflect the price changes in services.

The Wholesale Price Index counts goods only.

PPI gives a clear picture of inflation in an economy, while WPI It does not reflect inflation in an economy.

PPI also removes multiple counting bias inherent in WPI. The shedding of additional costs on products imposes by taxes and transportation makes it a more accurate gauge of price movements.

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