CPI or WPI?

Back after a really long gap. I was training to be part of the first team of astronauts from India to Mars. I failed to make the cut so am back now on this website. Only to discover that all my money that was parked in midcaps has all but disappeared while I was away! I should have made that trip, I now regret my failing the entrance tests. Isn’t it true that Mars is the ruling planet of all midcaps? fiery, combative and volatile. mangal ho sabka!

The other big news is that the lady that’s our household help is hoping to be a leg up over inflation and has therefore delivered a verbal notice (in Telugu) for a generous increase in her wages. Since we don’t understand Telugu, that’s what we understood her point to be. Surely, she follows the other Andhra gentleman who is also the RBI guv, who seems quite sure that dipping the repo isn’t really going to get general prices down. He means ‘consumer’ prices. If you remember, the earlier technicality was to do with whether inflation is ‘supply side’ or ‘demand driven’. RBI said supply side constraints were pushing up prices. Point being that an increase in production capacity and productivity would bring prices down. On the other hand, the finance ministry seemed to have said all along that tweaking the monetary levers would push prices down – a reduction in rates would get investment and spending cycle going and therefore Mumbai should reduce the repo rates. Now, the debate has shifted to which rate should one look at. The RBI guv points to the stubborn consumer prices and demands that the government of the day do some serious belt tightening while Delhi points out the recent decline in prices in the mandis and thereby makes a stronger case for rate cuts going forward.

So is it the wholesale prices (tracked by the WPI) or the prices that end consumers pay (tracked by the CPI) should one follow? The answer surely cannot be the very Indian, “it depends” since, after all, economic policy and long term planning (as also salary revisions!) depend on the rate chosen. Most countries use the CPI and have dropped the WPI from their economic planning game since the seventies. The RBI is proposing we pay more attention at the CPI and make that our official inflation rate instead of the WPI. It’s said that since the CPI tracks movement in prices at the ‘point of sale’ that is really what matters to a country’s citizens. General public cannot buy at mandis at wholesale prices. So therefore, lets change our official inflation gauge to CPI instead of being one the few countries (Pakistan gives us company) that remain fixated on the WPI. Personally, I feel that the WPI serves us well. We are predominantly an export driven economy. The other industrialized nations have made the transition to being completely consumer driven industries. So they track consumer price level changes. What is confusing to me is China’s decision to move away from WPI in favour of the CPI like the industrialized nations – I personally think it is very much an export driven producer economy (bigger version of India) and the consumer culture has not yet set in there.

CPI vs WPIIt’s really funny – in 2008, when the CPI in India was way lower (7%) than the WPI (12%), people (i.e. industry lobbies) were pointing to the high CPI and asking for a rate cut. Now they are pointing to the WPI and still asking for rate cuts. This led me to read up articles on the net to check if there is some cyclicality, causality or inter-dependence between the WPI and the CPI. The reason why the WPI and CPI are not moving in step is easy to understand – just look at the constituents of the indices to figure it out. There’s no rocket science or great economic mumbo-jumbo when the Prime Minister says that the food costs are running ahead of all else – more so, those of the protein based foods. Core CPI (ex food and fuel) has really dropped from 10.5% (in Jan’12) to 8% (in Jan’13) – so it’s pretty obvious that the reason why the CPI as a whole is still ruling at 10.5% is because of food and fuel. The weightage of food and fuel is very different across the WPI and CPI. The weights of the items that form the CPI basket are derived from their share in a typical consuming household. So things like imports and exports and wastage and storage (remember food stocks piled up in FCI godowns?) become critical factors that can make end buyer prices very different from producer prices. At a very general level, does it not mean that WPI + supply chain related affects = CPI? You get the idea, right? So I did two things – I looked up the internet and also plotted CPI and WPI values over the past 7 years to check if any patterns or correlation exists. Take a look at this paper which says that in India, the WPI leads the CPI. It points out that the WPI seems to be predicated by market forces and that controlling the factors affecting WPI can give a lever to controlling the prices at the consumer level. India’s per capita income, though low, is increasing and the nation’s consumption basket is slowly shifting towards non-core food items and hence despite the high weightage of food items in the CPI, it is unable to lead the WPI to a greater extent. So, while the paper does point to the presence of bi-direction causality, the impact of the WPI on the CPI is higher than that of the latter on the former. Also, WPI leads CPI which makes it the leading indicator of consumer prices and therefore eligible as a inflation planning gauge in the Indian context.

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About Kaushal
foetus

One Response to CPI or WPI?

  1. Narayan says:

    Kaushal – this is brilliant….

    Cheers

    Like

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