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Why the CPI inflation rate differ from the WPI rate?

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Why the CPI inflation rate differ from the WPI rate?
posted Aug 11, 2017 by Mukul Chag

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Main reason for the difference in rates is due to the difference in nature of the commodities included in the baskets and the weights given to them. First, food items have a larger weight of nearly 50% in the CPI; whereas its weight is just around 25 per cent in WPI (including food items under manufactured category). On the other hand manufactured products have a high share of 65 per cent in WPI.

Remember that in India, basic or primary commodities like food and basic goods undergoes price rise first. Then this price rise often but not always spread into the rest of the economy.In the recent past, , inflation was driven by food prices.

The CPI therefore is more sensitive to changes in prices of food items and especially primary products. Consumer goods are the first point where price ris reaches. The inflation appeared in food products may be seasonal and short term they may not spread into the remaining manufactured items. Hence, the retail or CPI inflation is much higher than the WPI figures.

Second, services are not covered under WPI while they are well covered under CPIs. Consequently, service price inflation has a greater influence on CPIs.

Third cause for this difference is the source of price quotations. CPI data are collected from the retailers which often indicate larger price fluctuations compared to wholesale prices. Because of this, CPI inflation is known as retail inflation.

answer Aug 17, 2017 by Rani Das
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