Tuesday, 19 April 2016

Narrowing gap between WPI, CPI inflations

Commodity prices, with a large weight in WPI, have recovered a bit while food prices, which have a large weight in CPI, are coming down


Arvind Subramanian, the government’s chief economic adviser, should be pleased. Almost a year ago, he had made the point that the real rate of interest faced by Indian producers, based on the Wholesale Price Index (WPI), was much higher than that faced by consumers, based on the Consumer Price Index (CPI). At that time, the divergence between wholesale and retail price inflations was very high.
But that is changing rapidly. The chart shows the trajectories of CPI-based and WPI-based inflations. Note that, for September 2015, the difference between the two measures of inflation was 9 percentage points. For March 2016, the difference has narrowed to 5.68 percentage points. The chart shows how the two inflation measures are converging.
The reason, of course, is that commodity prices, with a large weight in WPI, have recovered a bit while food prices, which have a large weight in CPI, are coming down.
While CPI-based inflation is expected to remain around 5%, it’s likely that WPI inflation will edge up, narrowing the gap further. The real rates of interest faced by producers and consumers will converge.

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