How does the RBI find out the wholesale inflation? What all commodities are included?
Wholesale inflation is determined by what is known as the wholesale price index (WPI). WPI is the main measure of inflation of wholesale goods in India and accounts for changes in price levels of goods at wholesale level. A total number of 676 goods are part of the wholesale price index ranging from fuel, power, manufacturing goods etc. WPI is released every week allowing the government to monitor prices in the wholesale markets. The Reserve Bank of India monitors the WPI inflation to frame its repo rate policy.
The Wholesale Price Index (WPI) and Consumer Price Index (CPI) are the two techniques used to measure inflation.
WPI reflects the inflation pertaining to the change in the average price of the goods that are transacted in the wholesale market. It includes:
• Primary articles consisting of the price of food, non-food and mineral items
• Manufactured products consisting of food and non-food products
• Fuel and power
But, WPI totally skips the prices of services while calculating the inflation.
CPI takes into account the change in the average retail price of goods and services over a period of time. It includes:
• Food and beverages
• Tobacco, clothing and footwear
• Fuel and other items
CPI focuses on the change in the cost of living at the consumer’s end, whereas the WPI focuses on the inflation of the economy in the whole.
For common people, i.e. consumers, it is the CPI that is most relevant. CPI also covers the service sector. Therefore, the RBI linked CPI for fixing interest rates in India.
Through CPI, the RBI tried to increase the span of monetary control and monitor inflation better.