WPI - Is this a true measure of inflation? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

WPI - Is this a true measure of inflation?

Jun 24, 2010

Inflation can be defined as a general increase in price level of goods and services in an economy. One time increase in prices of goods and services is not inflation. For inflation to be present, the rise in prices of goods and services has to be persistent. Inflation reduces the purchasing power of the currency and if allowed to go up too much, it can destroy the entire exchange rate mechanism of the country. There are basically two methods to calculate inflation:-

  • Wholesale Price Index (WPI)
  • Consumer Price Index (CPI)

Most of the countries in the world use CPI to measure inflation. CPI tracks the prices of goods and services purchased by the end consumers. India is probably the only country in the world which uses WPI as a measure of inflation. As the name suggests, WPI uses prices of goods and services purchased at the wholesale market. Thus, it does not give true measure of inflation. WPI in effect, underestimates the true inflation as prices at the wholesale level are inevitably lower than the one the consumer ultimately pays.

Apart from this, the WPI basket includes 430 odd commodities. Inclusion of too many data points makes the sample insignificant as some of the commodities might no longer be as important as it were from the consumption perspective. Further, the WPI basket is not frequently updated to reflect the changes in consumption patterns. The last time the basket was reviewed, was in 1993-94.

It's high time that India uses the CPI measure to calculate inflation. The CPI basket is narrower than the WPI basket and includes the goods and services purchased by the end consumers. Thus, CPI is a true measure of inflation.

Why then is India not shifting to the CPI model? This is because there are quite a few hindrances towards a complete shift to the CPI model.

Notable ones include multiple CPI indices to choose from. For instance, there are various CPI indices like the CPI Industrial workers and the CPI Rural labor etc. Thus, shift to one particular index could be risky as it might completely ignore the price escalation in other areas. Further, the CPI numbers are reported on monthly basis. Thus, the information proves to be a laggard in terms of news flow.

WPI numbers are reported on a weekly basis and thus are of more relevance. Thus the use of WPI indicates that the inflation problem prevalent in India right now is much more severe than what the numbers reveal.

Equitymaster requests your view! Post a comment on "WPI - Is this a true measure of inflation?". Click here!


More Views on News

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

ONGC to NMDC: Here are 5 Stocks Value Investors Should Closely Track (Views On News)

Nov 26, 2021

Before investing in value stocks, research the company and gain insight into why the market is discounting it.

Top 5 Stocks FIIs Bought and Sold Recently (Views On News)

Nov 25, 2021

FIIs have largely stayed on sidelines for the past few months, withdrawing money across emerging markets.

Everything to Know About the Upcoming Tega Industries IPO (Views On News)

Nov 27, 2021

Are you looking to apply for the Tega Industries IPO? You must ensure that you know specific details.

3 Charts on Why the Indian Bull Looks Tired podcast (Views On News)

Nov 27, 2021

Rahul Shah explains the key reasons behind his pessimistic outlook on the stock market.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

How to Hit Rs 100 Crore Wealth in Your Lifetime (Equitymaster Wealth)

Nov 15, 2021

This is how you can achieve the ambitious goal of a net worth of Rs 100 crore.

Don't Sell these Stocks if the Market Falls (Profit Hunter)

Nov 17, 2021

These are the 3 types of stocks that you should not sell in a market crash.

MobiKwik IPO Opens for Subscription Soon. Key Things to Know Before Subscribing. (Views On News)

Nov 20, 2021

The Rs 19 bn issue is set to hit the market soon.


Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Nov 26, 2021 (Close)