Difference Between WPI and CPI

WPI vs CPI

Inflation is something we often hear regarding topics about our national economy but many people do not exactly know what it is and what it reflects ‘“ all they know is that high inflation rate is bad. Funny, sometimes people would shake their heads in disapproval knowing that inflation rates are high but in reality, their knowledge about inflation is pretty limited and ambiguous.

To indicate the rate of increase in price of a representative basket of goods on a point to point basis, an inflation rate is expressed. In essence, an inflation rate insinuates the cost of living over a time period, which is typically a year. Inflation rate simply tells us what to expect in terms of price increase. For example, if the inflation rate is 10 percent then you can roughly expect to get your essential commodities at a price of $110 if you get it at a price of $100 a year ago. A price increase of 10 percent is expected annually but it should be noted that inflation rates fluctuate because there are so many variables to be considered.

The above example is an extremely high rate. A 7 to 8 percent inflation rate is already considered as high and alarming while 2 to 3 percent is low and favorable. However, deflation should not be desired as it is not good for the economy. A moderate inflation is best because it provides incentives for growth.

So how is inflation calculated?

Some countries, which are only a few, use WPI (Wholesale Price Index) to calculate inflation. It takes into account the wholesale prices. It is easier to acquire these prices because the goods that are traded in the wholesale market are quite few. Easier data collection is the main reason why agencies elect to use this method. There is always a base year in calculating WPI and it is always assumed to be 100. Prices are compared with the base to get the WPI.

To get the inflation rate of a particular year, the difference of WPIs — in the beginning and end of the year — is calculated and it is expressed in how much percent it has increased. Often, WPIs are calculated on weekly basis.

Today, many countries have shifted in using CPI (Consumer Price Index) to measure inflation rates. Many economists argue that CPI is the best way as it denotes the “cost of living” more accurately. Inflation calculation based on CPI is established on changes in consumer prices for specific baskets of goods.

Mathematically, the processes are the same. Yet, the main difference between two indices relies on the variables, particularly, the goods that are taken into account. Many economists would say that WPI will poorly reflect the cost of living because it includes a lot of commodity variables that are insignificant. Out of 435 commodities, more than 100 is considered of no consequence to the actual economy but still used in the calculation of inflation. Thus, an erroneous measure will result.

Summary:

1. There are only few countries that use WPI to calculate inflation rates. Many nations have already shifted to using CPI.
2. WPI measures general level of price changes either at the level of the wholesaler or at the producer while CPI takes into account of consumer prices and the retail margins.
3. WPI is said to result an erroneous measure while CPI will describe actual cost of living and inflation rate more accurately.
4. There are a lot of insignificant goods that are considered in WPI. CPI, on the other hand, have well-selected variables.

Sharing is caring!