WEDGE BETWEEN CPI AND WPI

• The wedge between CPI- and WPI-based inflation during the current financial year has been significantly wide. While WPI-based inflation continues to be in the negative zone for fourteen months in a row from November 2014 to December 2015, CPI-based inflation averaged 4.8 per cent during the same period. The gap between the two inflation estimates was as high as 9 per cent in September 2015.

Reasons

• Base years of the two series are eight years apart as the base revision for WPI is long overdue. For CPI the base year is 2012-13 while for WPI it is 2004-05.
• WPI has 14.9% weightage for fuel and power compared to 6.8% weightage in CPI. Therefore the lowering of crude oil prices has lowered WPI to a greater extent than CPI.
• Food inflation has been persistently high for past few years. CPI has a 48% weightage for Food while WPI has only 24%. This is another reason for high CPI and subsequent wedge between the two indices.
• Finally, CPI has some services like Health, Education etc. which have been witnessing high inflation. These are absent from WPI thereby leading to a wedge between the two.
   

By: Vishal