InvestorQ : I have generally seen that there is a gap between the CPI inflation and WPI inflation. Why is that so and how to interpret it?
Katherine Gonsalves made post

I have generally seen that there is a gap between the CPI inflation and WPI inflation. Why is that so and how to interpret it?

Rutuja Nigam answered.
2 years ago

While CPI (Consumer price index) inflation refers to the retail side of inflation that you and I experience, the WPI (wholesale price index) is the inflation that the producers of goods and services experience. Here are some key reasons why these two inflations differ in the numbers and also in the trends. You often have a scenario wherein the CPI inflation is going up while the WPI inflation is moving down.

· It is largely about food inflation versus non-food inflation. If you were to break up this gap into these two categories then food inflation contributed 2.2% to this gap between CPI and WPI at its peak. At the same time, the non-food inflation contributed 9.5% to the gap between CPI and WPI at its peak. This is contrary to the popular belief that most of the gap is due to differences in food inflation. In reality, the real reason for the gap between CPI and WPI is non-food inflation.

· One needs to understand the composition of CPI inflation and WPI inflation to understand why these stark differences arise. For example, food articles account for a whopping 48.3% of CPI inflation while they account for just about 24.3% in case of WPI inflation. So any rise in food inflation tends to have a larger percentage impact on CPI than on WPI. In August we saw the food inflation coming down sharply by over 250 bps and that was the reason for the gap narrowing. However, if food inflation were to pick up, then this gap could actually widen.

· Within the non-food category, fuel is a major area of difference between CPI and WPI calculations. While CPI assigns a weightage of 6.8% to fuel, WPI assigns a weightage of 14.9% to fuel. As is evident in the chart below, for the full year 2015, the WPI was in negative territory despite food inflation being positive. That is because of the higher influence of fuel on the WPI. In fact, low oil prices were one of the major reasons for the sharp fall in WPI into negative territory during the year 2015.

· There is one more item that causes this gap between WPI and CPI. There are certain services that have a weightage in CPI but do not figure in WPI at all. For example services like Medical Care, Education, Travel and Communication do not feature as part of WPI, but they constitute nearly 28.3% of the CPI. And during the last 1 year, all these services have seen higher inflation except travel and communication that has seen costs coming down.

What are the major takeaways from the inflation comparison? In a nutshell, the gap between CPI and WPI can largely be attributed to the specific components. Suffice to say that with the impact of oil and food inflation getting largely neutralized, one can hope for the gap between CPI and WPI to remain in a more acceptable range of 1-3%.