When prices rise, how do we know by how much? India uses price indices to measure this. The two most important are the Wholesale Price Index (WPI) and the Consumer Price Index (CPI). They look at prices at different stages and are made by different offices. The RBI uses one of them to set its policy. Exams ask about who compiles them, their base years and their differences. This post explains them in simple words. It ends with 15 previous year questions.
Key Points (Quick Revision)
- WPI measures prices at the wholesale level. It is compiled by the Office of the Economic Adviser, DPIIT, Ministry of Commerce and Industry.
- CPI measures prices paid by consumers. CPI (Rural, Urban and Combined) is compiled by the National Statistics Office (NSO).
- WPI does not include services; CPI does.
- The RBI uses CPI (Combined) inflation for its target of 4%, with a band of 2% on either side.
- The current WPI series has the base year 2011-12.
1. What is a price index?
A price index compares the price of a fixed basket of goods today with its price in a base year. The base year is given the value 100.
- If the index is 150, prices are 50% higher than in the base year.
- The change in the index over a year gives the rate of inflation.
- Each item has a weight based on its importance in the basket.
Inflation measured this way is usually year-on-year: the index of a month compared with the same month last year.
2. Wholesale Price Index (WPI)
WPI tracks prices at the first point of bulk sale, before goods reach shops.
- It is compiled and released monthly by the Office of the Economic Adviser, under the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry.
- The current series uses 2011-12 as the base year.
- It has three main groups:
| Group | Share in WPI |
|---|---|
| Manufactured products | Largest share, about two-thirds |
| Primary articles | About one-fifth |
| Fuel and power | The smallest share |
WPI covers goods only. It does not include services such as transport, health or education. A revised series with a newer base year has been under preparation; check the latest base year before the exam.
3. Consumer Price Index (CPI)
CPI tracks the retail prices that households pay. India has several CPIs:
| Index | Compiled by |
|---|---|
| CPI (Rural), CPI (Urban), CPI (Combined) | National Statistics Office, Ministry of Statistics and Programme Implementation |
| CPI for Industrial Workers (CPI-IW) | Labour Bureau, Ministry of Labour and Employment |
| CPI for Agricultural Labourers (CPI-AL) | Labour Bureau |
| CPI for Rural Labourers (CPI-RL) | Labour Bureau |
- CPI includes food, housing, clothing, fuel and services such as health, education and transport.
- Food and beverages have the biggest weight in CPI (Combined), so food prices move CPI inflation a lot.
- CPI-IW is used to fix dearness allowance for government employees.
Base years of the CPIs are revised from time to time. Check the latest base years before the exam.
4. Why the RBI uses CPI
In 2014, the Urjit Patel Committee recommended that the RBI target CPI (Combined) inflation, since it reflects what people actually pay.
- In 2016, the RBI Act, 1934 was amended to set up a Monetary Policy Committee (MPC) and a legal framework for inflation targeting.
- The target is 4% CPI inflation, with a tolerance band of 2% to 6%.
- The target is set by the Central government in consultation with the RBI, for five years at a time.
If inflation stays outside the band for three quarters in a row, the RBI has to explain the reasons to the government.
5. WPI vs CPI
| Point | WPI | CPI |
|---|---|---|
| Prices measured | Wholesale, first point of bulk sale | Retail, paid by consumers |
| Compiled by | Office of the Economic Adviser, DPIIT | NSO (Rural, Urban, Combined); Labour Bureau (IW, AL, RL) |
| Services | Not included | Included |
| Biggest weight | Manufactured products | Food and beverages |
| Used for | Tracking producer prices and trade | RBI's inflation target, dearness allowance |
6. Related terms
- Headline inflation - inflation of the full index, including food and fuel.
- Core inflation - inflation without the volatile food and fuel items.
- GDP deflator - the ratio of nominal GDP to real GDP; it covers all goods and services produced in the economy.
- Deflation - a fall in the general price level; disinflation - a fall in the rate of inflation.
7. Previous year questions
- Who compiles the Wholesale Price Index in India? – Office of the Economic Adviser, DPIIT
- Under which ministry does the Office of the Economic Adviser work? – Ministry of Commerce and Industry
- What is the base year of the current WPI series? – 2011-12
- Which group has the largest weight in WPI? – Manufactured products
- Does WPI include services? – No
- Who compiles CPI (Rural, Urban and Combined)? – National Statistics Office (NSO)
- Who compiles CPI for Industrial Workers? – Labour Bureau
- Which index is used to fix dearness allowance? – CPI-IW
- Which price index does the RBI use for inflation targeting? – CPI (Combined)
- What is the RBI's inflation target? – 4%, with a band of 2% to 6%
- Which committee recommended CPI-based inflation targeting? – Urjit Patel Committee
- In which year was the Monetary Policy Committee set up by law? – 2016
- Which group has the largest weight in CPI (Combined)? – Food and beverages
- What is inflation without food and fuel called? – Core inflation
- What is a fall in the rate of inflation called? – Disinflation
8. How to revise this topic
Start with who compiles what: WPI - Office of the Economic Adviser; CPI-R/U/C - NSO; CPI-IW, AL, RL - Labour Bureau.
Next, fix the key difference: WPI is wholesale and has no services; CPI is retail and includes services.
Then learn the RBI link: Urjit Patel Committee 2014, MPC by law in 2016, target 4% within 2% to 6%.
Finally, remember the terms: headline, core, GDP deflator, deflation and disinflation.
9. Frequently Asked Questions
What is the difference between WPI and CPI?
WPI measures prices at the wholesale level and covers only goods, while CPI measures the retail prices paid by consumers and includes services. WPI is compiled by the Office of the Economic Adviser and CPI (Combined) by the NSO.
Which price index does the RBI use?
The RBI uses CPI (Combined) inflation for its inflation target of 4%, with a band of 2% to 6%, under the framework set up in 2016.
Who compiles WPI in India?
The Office of the Economic Adviser, under the Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, compiles and releases WPI every month.
What is CPI-IW used for?
The Consumer Price Index for Industrial Workers, compiled by the Labour Bureau, is used mainly to fix the dearness allowance of government employees and workers.
What is core inflation?
Core inflation is the rate of inflation after leaving out volatile items such as food and fuel. It shows the underlying trend of prices.
For more Economy topics in simple language, see our Inflation - Types, Causes and Effects, Monetary Policy and RBI and Its Functions posts, or browse the Economy section. Preparing for a banking exam? Start with the RBI Grade B guide or join the 100 Hour GS Course.