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WPI
Context:
India’s wholesale inflation, measured by the Wholesale Price Index (WPI), dropped to a three-month low of 2.04% in July, down from a 16-month high of 3.36% in June, largely due to a significant decrease in food prices.
Reasons for the decline in WPI:
- Decrease in Food Prices: Inflation for primary articles, especially food items, fell significantly, reducing overall WPI inflation.
- Stabilisation of Fuel Prices: Fuel and power inflation slightly increased but remained stable due to eased high fuel prices.
- Manufactured Products: Inflation for manufactured products rose but this increase was modest and did not offset declines in other sectors.
- High Base Effect: The decrease in WPI inflation was partly due to a high base effect from July 2023, when inflation rates were higher.
- Overall Economic Conditions: Effective supply chain management and government interventions likely contributed to price stabilisation across various sectors.
Impact of High WPI Inflation on Economy:
- Input Costs: Rising input costs increase business production expenses, potentially leading to reduced profit margins or higher consumer prices.
- Consumer Purchasing Power: Higher input costs can erode consumers’ real income, potentially decreasing overall demand for goods and services.
- Economic Growth: Persistent increases in input costs can slow economic growth and reduce investment due to heightened uncertainty.
- Pressure on Monetary Policy: High WPI inflation can complicate monetary policy decisions for the Reserve Bank of India (RBI).
- Although the RBI primarily focuses on CPI for its monetary policy, significant increases in WPI can signal rising inflationary pressures that may necessitate adjustments in interest rates to control inflation.
WPI vs CPI:
WPI vs CPI Divergence:
Basket of Goods:
- WPI focuses primarily on basic and intermediate goods traded in the wholesale market.
- CPI reflects the retail prices of a broader range of goods and services consumed by households, including services not captured in WPI.
Weightage Variations:
- Food articles have a higher weight in CPI (around 46% overall, up to 54% in rural areas) compared to WPI (approximately 15%).
- This means fluctuations in food prices can have a more pronounced effect on CPI inflation.
Inflation Transmission Lag:
- WPI inflation often influences CPI inflation with a time lag.
- While wholesale prices may rise quickly, the impact on retail prices may take longer, especially if consumer demand is strong.
- This can lead to a temporary divergence where WPI inflation increases while CPI inflation remains stable or increases slowly.
Cost-Push Inflation:
- Rising input costs, particularly in fuel and power (around 14.9% in WPI vs 6.8% in CPI), have a more significant impact on WPI.
- Higher production and transportation costs due to fuel price increases may not immediately translate into higher retail prices if businesses absorb some of the costs.