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ET Explains: The CPI-WPI gap, and how CPI movements impact your grocery bill

There have been frequent claims that the CPI does not precisely reflect what consumers across India actually pay. And there is enough ground behind these claims. Here are a few case studies from across metro cities.

ET Online|
Updated: Oct 17, 2019, 11.48 PM IST
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ET Explains: The CPI-WPI gap, and how CPI movements impact your grocery bill
Consumer price index (CPI) inflation, also known as retail inflation, in India accelerated to 3.99 per cent in September from 3.28 per cent a month earlier, primarily because of higher food prices. It was a level nearer to RBI's medium-term inflation target of 4% than any time in the last 14 months.

During the same time, wholesale price index (WPI) inflation fell to 0.33 per cent from 1.03 per cent in August. It was the lowest level in WPI in more than three years — due mainly to a fall in prices of fuel and manufactured goods. The previous low for this index was 0.1 per cent, seen in June 2016.

How does a movement in CPI affect the prices you pay for your grocery and other goods? ET answers:

How a movement in CPI compares to the price you pay (in different places)
There have been frequent claims that the CPI does not precisely reflect what consumers across India actually pay. And there is enough ground behind these claims. Here are a few case studies from across metro cities, culled from a ToI report based on Consumer Affairs Ministry data.

— Delhi and Chennai consumers have been shelling out more for arhar than what the CPI gauge indicates. Mumbai pays less than the CPI, while Kolkata prices broadly move in tandem with the inflation gauge.

— Milk retails in Mumbai for less than what CPI shows. In Chennai, the reverse holds true.

— Prices of onion have always been very volatile in India. The rise in the price consumers pay — anywhere, everywhere — always outstrips the rise of these items in the CPI gauge.

— The CPI number is far lower than what Delhiites pay for their potatoes, while Mumbaikars pay less than the CPI for the same item.

— Mumbai pays less for rice than what the CPI measures. The exact opposite happens in Delhi's case.

— Delhi sugar prices mostly move in lockstep with the CPI. In the three other metro cities, people shell out more than what the CPI shows.

Where does inflation stand in terms of what RBI wants?
CPI inflation has broadly been within the Reserve Bank of India's comfort zone. The central bank has retained its consumer price inflation forecast for the second half of 2019-20 at a range between 3.5 and 3.7%.

The September numbers also show that consumer price is rising while wholesale price is falling. What does it really mean? ET explains:

What is the reason behind this divergence?
There have been more than a few times when this gap in CPI and WPI has been witnessed. There is a host of reasons for it, which include the difference in weightage assigned to different goods/items that make up the two baskets.

For example, in the consumers basket, food has a much higher weightage than in the wholesale basket. This essentially means a rise in food prices will cause a bigger spike in the CPI basket than in the WPI one.

Similarly, manufactured goods are given more weightage in the wholesale basket. Therefore, any movement in the price of such items will move the WPI more than it does the CPI.

Is there a cause for worry in the fall in WPI, and if there is, why?
A fall in wholesale price can be a sizeable cause for worry for both the government and RBI, primarily because it indicates poor performance on the part of manufactured products.

These goods doing poorly essentially means that India's manufactueres are losing their pricing power — a key determinant of the fate of any given industry.

What is so special about the CPI-WPI gap in September?
It is somewhat surprising, but there are too many data points to think otherwise: the divergence between consumer price and wholesale price is the starkest in and around the month of September.

Since January 2014, the highest gap between the two inflation gauges was witnessed in September 2015. During that month, CPI stood at 4.4 per cent and WPI at -5.6 per cent, meaning a divergence of a huge 10 percentage points.

Also Read

WPI remains unchanged at 1.08% in August

Cheaper fuel, food cost eases Sep WPI to 0.33%

WPI inflation eases to near 2-year low at 2.02% in June

WPI inflation slips to 3.07% in April on cheaper manufacturing products

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