Consider the following statements:The weightage of food in Consumer Price Index (CPI) is higher than

Question

Consider the following statements:The weightage of food in Consumer Price Index (CPI) is higher than that in Wholesale Price Index (WPI).The WPI does not capture changes in the prices of services, which CPI does.Reserve Bank of India has now adopted WPI as its key measure of inflation and to decide on changing the key policy rates.Which of the statements given above is/are correct?

Accepted Answer

Inflation can be described as the general rise in the price of goods and services in an economy over time. It is calculated by tracking the increase in prices of essentials.The Methods To Calculate InflationCPIThe primary index that tracks the change in retail prices of essential goods and services consumed by Indian households is the Consumer Price Index or CPI. It shows the impact of inflation on people.It is always used for Dearness Allowance. Now, it is also being used for monetary policy formulation.Since 2010, based on the Rangarajan Committee's report, CPI (URBAN), CPI (RURAL), CPI (COMBINED) and CFPI - food indices are calculated therein.It covers both goods and services.200 Goods and services are taken - It is a selected basket of goods and services. The weightage of food in the CPI is close to 50% (The weightage for food is lower in WPI). Hence statement 1 is correct.WPIWhile retail inflation looks at the price at which the consumer buys the product, WPI is measured based on prices at the wholesale level. WPI measures the changes in the prices of goods sold and traded in bulk by wholesale businesses to other businesses. It reflects the inflation in the economy in general/general level of inflation or price level in the economy.Another difference between the two indices is that the wholesale market is only for goods; you cannot buy services on a wholesale basis. So WPI does not include services, whereas the retail price index does. WPI, unlike the Consumer Price Index (CPI), only tracks the prices of goods purchased by consumers. Hence statement 2 is correct.697 goods are taken: Primary goods, Fuel and power, and Manufacturing goods, the latter being given the maximum weightage (64.23%).Wholesale prices are considered.Base year = 2012.Based on the suggestions of the Urjit Patel Committee, monetary policy (MP) in India is to be formulated in reference to the CPI (instead of WPI) based inflation. (The suggestion was accepted in 2014 itself.) The reason is that:CPI shows the impact on the people - WPI indicates the wholesale price, whereas CPI shows the retail price i.e. the price at which people make purchases from the retail market. WPI does not show the impact of inflation on the people. Any policy should consider the impact on the people.WPI does not account for the price in services.It is an international best practice - most of the countries have shifted to CPI.Hence statement 3 is not correct.Source Citation: Financial Express: Wholesale Price Index Meaning