Consider the following statements: 

1. The weightage of food in the Consumer Price Index (CPI) is higher than that in the Wholesale Price Index (WPI). 

2. The WPI does not capture changes in the prices of services, which CPI does. 

3. The Reserve Bank of India has now adopted WPI as its key measure of inflation and to decide on changing the key policy rates. 

Which of the statements given above is/are correct? 

(a) 1 and 2 only 

(b) 2 only 

(c) 3 only 

(d) 1, 2 and 3 

Answer: a

Explanation:

Wholesale Price Index

• Wholesale price is generally defined to capture all bulk transactions of goods carried out in the domestic market. The universe of WPI, therefore, comprises all possible transactions at first point of bulk sale in the domestic market. However, there are, in practice, many points of bulk sale, such as for agricultural items for which it refers to the mandi price; for minerals, it refers to ex-mine prices; and for petroleum products it refers to Refinery Transfer Price (RTP)
• The Office of the Economic Advisor (OEA), Ministry of Commerce and Industry, publishes WPI with effect from 1942 onwards.  
• The WPI commodity basket has three constituent commodity groups (a) primary articles, (b) fuel, power, light, and lubricants and (c) manufactured products, with weights primary articles 20.618 %, fuel, power, light, and lubricants 13.152 % and manufactured products   

64. 230%. 

Selection of Base Year 

The well-known criteria for the selection of a new base year are:

(i) a normal year, i.e., a year in which there are no abnormalities in the level of production, trade and in the price level and price variations

(ii) a year for which reliable production, price and other required data are available, and 

(iii) a year as recent as possible and comparable with other data series.  

The year 2011-12 was assessed to be a normal year from the point of view of agriculture production and commodity prices. The Central Statistics Office (CSO) shifted its National Account Statistics (NAS) base to the new base year of 2011-12. In order to make the WPI series compatible with other important series in terms of a common base to all of them it was decided that the year 2011-12 would be the new base year for the new WPI series also.  

Base year revised from 2004-05 to 2011-12 in 2015

 2004-05 The set of Wholesale Price Index numbers with base year 2004-05 was introduced with effect from 14th September, 2010. Significant structural changes have taken place in the Indian economy since then. Therefore, it became necessary to revise the index basket of the existing series of Index numbers of Wholesale Price in India (Base 2004-05=100).and revisit a range of issues such as examination of the coverage of commodities, base year, and weighting diagram etc. 

Comparative Statement of Weight assigned to Product Groups  in old and new WPI series

Consumer Price Index (CPI) 

• CPI measure changes over time in general level of prices of goods and services that households acquire for the purpose of consumption. 
• CPI numbers are widely used as a macroeconomic indicator of inflation, as a tool by governments and central banks for inflation targeting and for monitoring price stability, and as deflators in the national accounts. 
• CPI is also used for indexing dearness allowance to employees for increase in prices. CPI is therefore considered as one of the most important economic indicators. 
• National Statistical Office under MOSPI publishes CPI.
• In India, the most important category in the consumer price index is Food and beverages have the highest weightage (45.86 percent of total weight), {of which Cereals and products (9.67 percent), Milk and products (6.61 percent), Vegetables (6.04 percent), Prepared meals, snacks, sweets, etc. (5.55 percent), Meat and fish (3.61 percent), and Oils and fats (3.56 percent)}. 
• Miscellaneous accounts for 28.32 percent, {of which Transport and communication (8.59 percent), health (5.89 percent), and education (4.46 percent). 
• Housing accounts for 10.07 percent; Fuel and light for 6.84 percent; Clothing and footwear for 6.53 percent; and Pan, tobacco and intoxicants for 2.38 percent.

Hence, statements 1 and 2 are correct.

In 2013, the consumer price index replaced the wholesale price index (WPI) as a main measure of inflation. RBI  uses CPI-combined as a measure of inflation. 

Core inflation, measured by excluding food and energy items from CPI headline inflation. 

(Headline inflation includes all items in basket)

Core Inflation corresponds to the component of inflation that is likely to continue for a long period. Thus, core inflation captures the underlying trend of inflation and is, therefore, more stable. Unlike the non-core component of inflation, core inflation is not affected by temporary shocks. In India, core inflation is generally measured by excluding highly volatile components from the headline inflation. By their very nature, food and fuel have been highly volatile. Therefore, we arrive at core inflation by removing food and fuel components from the headline inflation. As headline inflation exhibits volatility due to short run shocks, Central banks in many countries focus on core inflation.

Hence, statement 3 is incorrect.

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