Wholesale and retail inflation are drawing close to each other again?

Even as India's retail inflation (Consumer Price Index CPI) and wholesale inflation (Wholesale Price Index) continue to rise on the back of high food prices, there is some correction in an 'anomaly' that  has been plaguing the two numbers for some time now. 

The two inflation numbers have been growing apart since 2008 and can finally be seen converging towards each other. WPI was at 3.55% in July compared to 1.62% in June and -4% in July of last year. 

For the past years, CPI was always in positive, growing at 5-5.5% rate while WPI was always negative. The greatest divide between the two inflation indicators was noticed in June 2015 which was at 7.8%. 

The headline inflation (WPI) has been on the rise since October 2015.

One reason for the divergence could be the disinflation in commodity prices in the global market, says Madan Sabnavis, chief economist, CARE Ratings.  

WPI, largely being a barometer of prices of manufactured and fuel products, always seemed to contract. Manufactured products, which include machinery, chemicals and metals, are given a weight of 64.97 % in the index and fuel (and power) about 14.9 %. 

source: tradingeconomics.com

Whereas CPI inflation is primarily driven by food inflation. Food, where inflation hurts consumers directly, has a weight of only 14.3 % in WPI and a little over 45% in CPI basket. 

There is a difference in base years of both the indicators. WPI is calculated with base year for prices as 2004-05 while CPI uses 2011-12. 

source: tradingeconomics.com

But the popular opinion is not only because of the difference in base years but also because of the chances that supply inefficiencies are worsening in India due to poor investment in infrastructure and rising transport and logistics costs – both for farm produce and industrial goods. 

Does the surge in WPI inflation numbers imply India’s investment in infrastructure and transport projects has increased? 

In 2012, the Ministry of Statistics and Programme Implementation stated in a report that conceptual and definitional differences contribute to the differences in their (CPI &WPI) price movements.  

Definitional differences are due to composition of the commodities and also due to types of prices used in compilation. 

CPI which is the weighted average of basket of consumer goods, replaced WPI, which measures a representational basket of wholesale goods, as the main inflation indicator of India. 

The varying inflation indicators posed a problem for policy makers as movement of consumer prices indicated toward higher interest rates while lower WPI numbers indicated toward reduction in key rates, Indian Express said in a report. 

source: tradingeconomics.com

CPI inflation that rose for a fourth month in a row was also attributed to surge in commodity prices. 

Economists say that ideally CPI should not be more than one percentage point of WPI on either side. Currently CPI stands at 6.07% while WPI is at 3.55% although target retail inflation set by the RBI is at 4% for this fiscal.