VARIATION IN INFLATION RATE DEPICTED BY THE W.P.I. AND THE C.P.I. FOR INDUSTRIAL WORKERS

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Backgrounder

The Whole Sale Price Index: 1993-94 (WPI) and the Consumer Price Index Numbers for Industrial Workers 1982=100 (CPI-IW) are the widely used indices for measuring inflation in the country. Whenever there is a variation depicted by these two, the issue of their respective methodology gets into limelight and Social Partners start doubting about veracity of these indices and suitability of the methodology of their compilation. However, the detailed examination of the nature and the methodology of compilation of these two indices have shown that the variation in the pattern of these indices is not due to any deficiency in their scope and coverage. It has been observed that the divergence in inflation rate depicted by WPI and CPI-IW during 1995-2001 is largely due to the differences in their nature, scope, coverage and weighting pattern. The WPI inflation is mostly influenced by the behaviour of prices of items of "Manufactured Products Group" due to its higher weight to the tune of 63.75% (57.04% on old Base). On the other hand, the CPI-IW inflation is influenced by the behaviour of prices of items of "Food Groups" which account for 57% of weight. Some of the major reasons for variation are :-

1. The first and foremost difference in the two indices is in their perspective. The Wholesale Price Index is designed to measure the temporal price change of wholesale transactions of all commodities in the country whereas the CPI-IW measures the change in consumer (retail) price of fixed basket of goods and services consumed by industrial workers.
2. The 2^nd important difference between the two indices is the basis of the inclusion of the items in the basket. In W.P.I. the base of inclusion is importance of the commodity produced or transacted in the economy whereas in CPI-IW the items are included on the basis of the consumption pattern of the industrial workers. Apart from the consumption goods, the basket of CPI-IW also includes services (like education fee, doctor’s fee, personal care etc.) and shelter cost which are not covered under Wholesale Price Index Numbers. Thus, there is a wide variation in the composition and coverage of items.
3. There is also a difference in the weighting pattern of the two indices. The weights of items in W.P.I. have been assigned in proportion to their share in the total value of transaction (output) in the economy whereas in CPI-IW the weights are assigned in proportion to their share in the consumption expenditure of the family of industrial workers in the selected centers. At group level, the food items account for major proportion of weights (57%) in CPI-IW as against combined weighed of 26.94% in respect of Food (Primary and manufactured products) in W.P.I. Likewise, the manufactured products account for major proportion (63.75%) in WPI as against about combined weight of 22% on CPI-IW. Moreover, when the common items in the two indices are compared, it shows that they constitute 64.44% of weight in CPI-IW and 39.41% of weight in WPI. Thus, the CPI-IW is influenced mostly by items (to the extent 35.56%) which do not influence WPI and WPI is significantly influenced by items (to the extent 60.59%), which have no role in influencing the CPI-IW.
4. Besides, there is also a variation in the spatial spread of the price quotations between the two indices. It is very narrow in WPI as against CPI-IW. In the WPI. 1918 price quotations in respect of 435 different commodities are utilized for index compilation as against about 2,00,000 quotations from 226 markets of 70 centres in the CPI-IW.
5. The nature of price quotations used in the compilation of these two indices is also responsible for wide variation between the two. The price quotations used in case of WPI represent prices of bulk transactions at primary stage whereas in CPI-IW price quotations relates to retail prices actually paid by the consumer for specific unit of purchase and are inclusive of all types of charges (taxes) payable by the consumer.
6. The observed differences in the inflation rates between these two indices (during the period 1995-2001) in the back drop of structural differences, have shown that the CPI-IW inflation was largely "Food Group" driven whereas WPI inflation rate was "Manufactured Products Group" driven.