InvestorQ : I understand there are 2 types of inflation; CPI and WPI inflation. What is the difference between the two?
ishika Banerjee made post

I understand there are 2 types of inflation; CPI and WPI inflation. What is the difference between the two?

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2 years ago
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Historically, there has been a gap between WPI inflation and CPI inflation announced by the MOSPI each month. The Wholesale Price Index (WPI) is based on producer prices while the Consumer Price Index (CPI) is based on consumer prices. In India, the market is vast and largely inefficient. In an efficient market, the price changes at the producer level will immediately translate into price changes at the consumer level. This would ensure that the gap between WPI and CPI does not remain wide for too long and will tend to converge towards a more reasonable gap of 1-3% sooner rather than later. However, there are a variety of inefficiencies. Firstly, there are multiple players like wholesalers, distributors and retailers and these margins tend to get loaded on the final price. As a result a price change at the origin does not seamlessly get passed on. Secondly, there are a variety of taxes at the central, state and municipal level. These tend to distort any seamless relationship between WPI and CPI. Lastly, there is the issue of the demand pattern at the WPI level being different from the demand pattern at the CPI level.

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