Introduction
The latest inflation numbers present an intriguing picture, showing a decreasing Consumer Price Index (CPI) and a rising Wholesale Price Index (WPI).
This divergence can be puzzling for analysts, policymakers, and the general public.
Key Differences: CPI vs WPI
Scope and Coverage:
CPI: Measures retail prices affecting consumers.
WPI: Focuses on wholesale prices impacting manufacturers.
Basket of Goods:
CPI: Heavily weighted towards food (46%).
WPI: More balanced, with food accounting for about 24.4%.
Vulnerabilities:
CPI: Susceptible to climatic changes affecting food prices.
WPI: Vulnerable to changes in global commodity prices and crude oil prices.
Driving Factors
Climate Phenomenons and CPI
El Niño can lead to failed monsoons, affecting agriculture in India, where more than 40% of sown areas depend on these rains.
This impacts food prices and, in turn, drives up the CPI due to its higher weightage on food items.
Geopolitical Instability and WPI
Changes in crude oil prices, often driven by geopolitical tensions, primarily affect WPI due to the higher weightage given to fuel and power.
Consequences of Negative WPI
A negative WPI implies deflation in the average prices of manufacturing inputs, possibly discouraging manufacturers. It's an essential metric for many sectors and influences global investment decisions.
Role of RBI
With crude oil prices expected to rise, the Reserve Bank of India must monitor both indices to manage business confidence and control inflation for the end consumer.
Conclusion
Understanding the factors contributing to these diverging trends is crucial for policy formulation.
The CPI-WPI gap in India is mainly due to the differential weightage given to food items and susceptibility to different types of economic and environmental factors.
Thus, a holistic approach is needed to interpret and act on these indices effectively.
