What is Consumer Price Index (CPI)?
The Consumer Price Index (CPI) is a measure that examines the average change in prices paid by consumers for a basket of goods and services over time. It is one of the most widely used indicators for inflation and is important for assessing changes in the cost of living for households.
In other words, CPI is based on a representative basket of goods and services that are commonly purchased by urban consumers. This basket typically includes items such as food, clothing, housing, medical care, education, and transportation. Prices for the items in the basket are collected regularly from a variety of retail outlets, stores, and service providers.
The CPI is reported as an index number, with a designated base period used as a reference point. Changes in the index reflect the percentage change in prices relative to this base period.
The Consumer Price Index (CPI) is calculated using a specific formula that involves several steps. The basic formula for calculating the CPI is as follows:
What Is a Wholesale Price Index (WPI)?
The Wholesale Price Index (WPI) is a measure that tracks and analyzes the changes in the prices of goods at the wholesale level. It is used to monitor and assess inflationary pressures in the economy.
Wholesale price indexes are reported monthly to track the overall rate of change in producer and wholesale prices. The index is set at 100 for its base period, and calculated based on subsequent price changes for the aggregate output of goods.
in other words, the WPI is calculated by taking into account the average price changes of a basket of goods that represent the overall economy.
The basket of goods typically includes commodities such as raw materials, intermediate goods, and finished goods. The prices of these goods are collected from various wholesale markets. The WPI is expressed as an index number that indicates the relative change in prices compared to a base period.
Usually expressed in terms of the percentage change from the prior month or a year earlier, the WPI is an inflation indicator. In the U.S., the WPI has been reported as the Producer Price Index (PPI) since 1978.
Governments, policymakers, and economists use the Wholesale Price Index to understand inflation trends, make informed economic decisions, and formulate monetary and fiscal policies. It provides valuable insights into the cost pressures faced by producers and businesses at the wholesale level, and changes in the WPI can influence consumer prices (Consumer Price Index or CPI) and overall inflation in the economy.
Whole Price Index vs Consumer Price Index: Key Difference
| Feature | Wholesale Price Index (WPI) | Consumer Price Index (CPI) |
|---|---|---|
| Definition | Measures the average change in the selling prices received by domestic producers for their output. | Measures the average change in the prices paid by urban consumers for a basket of goods and services. |
| Scope | Focuses on goods at the producer or wholesale level. | Focuses on goods and services purchased by urban consumers. |
| Basket of Goods | Includes goods traded among businesses, such as raw materials and semi-finished goods. | Includes a representative basket of goods and services consumed by households. |
| Calculation Basis | Based on the price movements of goods at various stages of production. | Based on the prices paid by consumers at the retail level. |
| Inflation Indicator | Reflects inflationary pressures in the production and distribution stages. | Reflects inflation as experienced by the end consumer. |
| Target Audience | Primarily used by policymakers, businesses, and economists to assess inflation at the wholesale level. | Primarily used by policymakers and economists to gauge inflation as it affects consumers. |
| Weightage of Goods/Services | Goods are assigned weights based on their importance in the production process. | Goods and services are assigned weights based on their expenditure share in the consumer’s basket. |
| Frequency of Calculation | Usually calculated on a weekly basis. | Typically calculated on a monthly basis. |