8/3/2019 BPNFINAL

1/5

1

WHOLESALE AND CONSUMER PRICE INDICES

WPI:

The Wholesale Price Index or WPI is the price of a representative basket ofwholesale goods. Some countries use the changes in this index to measure

inflation in their economies, in particular India - The Indian WPI figure is

released every 10 days and influences stock and fixed price markets. The

Wholesale Price Index focuses on the price of goods traded between

corporations, rather than goods bought by consumers, which is measured by the

Consumer Price Index. The purpose of the WPI is to monitor price movements

that reflect supply and demand in industry, manufacturing and construction.

This helps in analyzing both macroeconomic and microeconomic conditions

CALCULATION OF WPI:

The wholesale price index consists of over 2,400 commodities. The indicator

tracks the price movement of each commodity individually. Based on this

individual movement, the WPI is determined through the averaging principle.

The following methods are used to compute the WPI:

y Laspeyres Formula (relative method)y Ten day price index method : under this method sample prices with high

intra-month fluctuations are selected and surveyed every ten days through

phone.utilizing the data retrieved by this procedure and with the assumption

that other non-surveyed sample prices remain unchanges,aten day price-

index is compiled and released.

y Calculation method: Monthlu price indexes are compiled by calculating thesimple arithmetic mean of three ten-day sample prices in the month.

8/3/2019 BPNFINAL

2/5

2

COMPOSITION OF WHOLE SALE PRICE INDEX:

The wholesale price index comprises of the following indices:

y Domestic wholesale price indexy Export price index(EPI)y Import price indexy Overall wholesale price index(OWPI):It covers five commodity groups-

agriculture,manufacturing,quarrying,import and exports,and mining

FEATURES OF WHOLESALE PRICE INDEX:

The features of wholesale price index are:y It captures the price movement extensively and is therefore taken as an

indicator of inflation

y The index is publishes weekly,with the shortest possible time gap of onlytwo weeks

y Used to analyse market activity and monetary conditions in an economyy It focuses on the changing nature of the economy of different kinds of

services such as railways,roadways,telecommunications and banking

These features highlight the utility of this index in monitoring ongoing changes

in an economy in order to suggest the need for any adjustment

CONSUMER PRICE INDEX(CPI):

The Consumer Price Index or CPI is a measure of the prices of

consumer goods and services bought at retailprices. This includes food,

fuel, clothing and pharmaceuticals. The percentage change in CPI measures

inflation. To compile the Consumer Price Index, a predetermined set of

goods, forming a typical basket of goods bought by an average urban

consumer, is selected. All the items are weighted according to the

percentage of income that households spend per category. An average of

8/3/2019 BPNFINAL

3/5

3

thechange in the prices of these items is calculated on a monthly basis. Core

CPI excludes food and energy prices, which are often volatile, and is an

indicator of the headline inflation rate

USEOF CPI:

Apart from measuring the inflation this index is useful in indicating the

need to adjust:

wages to keep pace with a rise in the cost of living

pensions

regulated prices

tax brackets to avoid increases in the rate of taxes induced by inflation

The Consumer Price Index is also used as a factor to translate long-term

financial figures or related indices into inflation-free or adjusted values.

CONSTRUCTION OF CONSUMER PRICE INDEX:

CPI is constructed through two kinds of data:

y Price data: Using the sampling method, this data is collected for goods andservices from sales outlets in different locations and for various times.

y Weighting data: This is the data on various types of expenditure, used torepresent the surveyed population from which the sample is taken.

A comparison of prices of various items under the constituents of

consumer expenditure (such as food, clothing and housing) is done every

month with their prices in the price-reference month. A base year is selected and

changes are presented as:

y percentage of the previous index levels

8/3/2019 BPNFINAL

4/5

4

y annual growth rate (to give an idea of near-term inflation to investors)However, volatility of the index from one month to another is one of its

weaknesses. Also, some biases related to fixed CPI, such as new product and

substitution, can lead to a distortion of results.

The consumer price index, along with national income and population census, is

calculated by governmental statistical agencies. The consumer price index

report has special importance for investors and triggers a movement in both

fixed income and the equitymarket.

DIFFERENCE BETWEEN WPI AND CPI:

Wholesale Price Index (WPI) and Consumer Price Index (CPI) are two indices

without which market wont survive. These two indices decide and set the

prices of goods in market. These tools also keep the track of changing prices.In

some countries, WPI is a tool to adjudge deflation rate in the market. The traded

commodities, good and services manufactured by different groups and

corporation are WPIs core. Namely five basic human commodity groups

manufacturing, agriculture, quarrying, mining, and in the export/import industry

are used to establish the status of WPI. Simply put, WPI is the middle price of

all the prices asked by the manufacturers for all the merchants to let them pay a

definite amount.

Consumer Price Index or CPI, on the other hand also denotes the middle price

but which is paid by end consumers, homeowners and private sectors to

purchase a particular service or commodity. Education, apparel, foods and

beverages, communication, transportation, recreation, housing, and medical care

are the 8 groups for which the CPI is set. Some services like school and

government registration fees and electricity and water bills are also included

sometimes. Sometimes, it is also referred to as standard retail price (SRP).

8/3/2019 BPNFINAL

5/5

5

These two indices WPI and CPI are important to determine the strength of a

countrys economy. WPI is used for deflation whereas inflation is marked by

CPI. If you are purchasing something in bulk, the rate should be lesser than CPI

or SRP