Wholesale Price Index is considered as important indicator of price movement in the commodity market. If you are a commodity trader or want to venture into it, you will often come across the term, Wholesale Price Index or WPI, which measures price of goods before it reaches to retail stage. Traders around the globe will look at WPI to guess accurately about commodity price movements to base their trading decisions.
So, what is wholesale price index and how it can help you make better investment decisions? The definition suggests, a WPI is a measure of inflation that tracks prices at early stages of a transaction. The wholesale price index gives an idea of the average change in the price of bulk commodities at the wholesale level, which means the price at the producers and traders’ level. The WPI index consists of prices of three broad categories—primary items, fuel and power, and manufactured products. It measures selected items and publishes indices which form the basis in the market. Since it is a measure of inflation, it is calculated in percentage against a base year.
What is a base year?
Any index is calculated against an anchored year, called base year. Base year refers to the first year of the series in calculating an index. By default, it is assigned value 100 for the benefit of calculation. It is adjusted time-to-time to include differences and make it accurate for advanced year calculation. The base year for calculation of WPI was 2004-05 earlier, but to align it with other economic indicators, the base year was updated to 2011-12. The revision of the base year also included a revision of the list of the products tracked for WPI.
The prices of a total of 697 items are tracked under the 2011-12 series of the wholesale price index, which includes 117 primary items, 16 items of fuel and power and 564 manufactured products.
What is the purpose of the WPI index?
The wholesale price index is used for a variety of purposes. Not only the commodity traders, WPI also helps government to understand inflation level at various stages. Wholesale prices affect retail prices, which has an impact on household finances. Excessive inflation in wholesale prices will reflect in retail prices and it can be damaging for the economy. WPI helps the government take timely action against inflation, especially inflation in prices of essential commodities.
Secondly, the WPI index is also used as a deflator for many sectors of the economy. Without adjusting the inflation against GDP growth, it is not possible to get a clear picture of the size of the GDP.
The wholesale price index is used for indexation of business contracts. Commodity traders use WPI for the valuation of future contracts. And lastly, WPI is a critical macro-economic indicator, which is tracked by global investors for investment decisions.
WPI being such a critical economic metrics is calculated and published by the Office of Economic Advisor, Department of Industrial Policy and Promotion in the Ministry of Commerce and Industry. They publish the data on a monthly basis. It is also called the headline inflation rate because a month-on-month rise in WPI is an indication of rising inflation in the economy.
To make it an accurate measurement of wholesale price movement in the economy, WPI is measured on nearly 700 items, which is quite a mammoth task. It takes some understanding of its process and methodology to calculate WP index.
To maintain the accuracy of the WPI, regular changes in the coverage, concept and methodology have to be made. With every revision of the base year, the basket of goods and their weightage also change. Different products have different weightage in the WPI basket of goods.
In the latest adjustment when base year was changed to 2011-12, 199 new items were added, and 146 products were dropped. Multiple price quotations of each item are taken for the calculation of the wholesale price index.
In the latest adjustment, taxes were excluded from the calculation of WPI to omit impact of fiscal policy on the index. For instance, the rollout of the goods and services tax did not have an impact on the WPI index due to the modification.
How Does The WPI Work?
WPI is reported monthly. At the end of the year, the agency calculates the total cost of goods and compare it against the base year. Since the default value of the base year is 100, the deviation of the current is then reported at a percentage.
Let’s assume that the base year (2011-12) price of the goods under consideration was Rs 1500. In 2020 the price changed to Rs 2100. So, WPI of the item in 2020 is (2100-1500)/8 or 7.5 percent.
WPI is not a constant number. It varies from country to country, even from year to year. Gradual movement of WPI is an important indicator that shows the government how product prices are moving in the economy.
WPI vs CPI
While we are discussing WPI, it is a good idea if we also touch upon CPI or Consumer Price Index. Like WPI, it is also a critical economic indicator which captures the movement of consumer price level or retail price movements.
The consumer price index is also a critical metrics of inflation and overall health of an economy. Using both WPI and CPI, government controls different policy measures and adjust them as needed.
Tracking price inflation at the wholesale level is a critical economic metric. The upward surge in WPI is an indication of rising inflation pressure in the economy. Analysts use it to track supply and demand dynamics. WPI and CPI, both throw light in the same direction though at different levels. CPI measures inflation level for the end consumers, whereas WPI estimates it at the factory gate.