Wpi and Cpi

NAME: Gaurav Bhati

Roll No. PGP/22/212

Section: D

1) In the article, we see a divergence between WPI and CPI. Why such a divergence is happening

Ans:

Reason for divergence between WPI and CPI

1. WPI measures inflation from producers side and hence once the price changes at producer level it get reflected in WPI first than in CPI hence there is divergence between WPI and CPI.
2. Composition of basket as well as weightage of items are different for both WPI and CPI.
3. Divergence under fuel inflation is highest as per the basket, more than 4 percentage point difference.
4. Core CPI and WPI manufacturing shows a difference of almost 2 percentage point, this implies that ease of price changes are not reflected or transferred to consumers directly.
5. CPI also contain change in service inflation which WPI does not show.

2) In the livemint article, we see a handshake happening between WPI and CPI.  Please mention the reason behind the same

Ans:

Handshake between CPI and WPI

1. As both WPI and CPI gives different weightage to different items cumulatively it adds ups in such a way that it shows just a difference of 1 basis point.
2. For example, WPI manufacturing and core CPI less difference as compare to CPI Fuel & WPI Fuel
3. Weightage assigned to food in CPI is 46% as compare to 24% given to food in WPI
4. Due to decrease in global prices of fuel has also further eased the pressure on WPI but due to heavy taxes imposed by government on fuel consumer end up paying higher.
5. Further when WPI was rising because the prices are increasing because of the lag between CPI and WPI for transferring prices, WPI rose while CPI did not show significant changes.

3) As a manager please tell me the signals you can deduce from WPI trends and CPI trends for output and prices the next quarter 

Ans:

• WPI is inflation price index from producer’s side and can act as a signal or early warning to find out trend in CPI.
• But it will also be important and wise to keep the track of individual basket in WPI and CPI. For example, fuel have different weightage in CPI and WPI so taking a close look at this will help us find out effect of it of CPI
• Core inflation and headline inflation need to be differentiated and tracked to guess the trend for the next quarter.
• As RBI uses CPI combined in its monetary policy, tracking this can predict the future stance of policy.
• For WPI, fuel prices are going up and consequently WPI will rise in future. This rise will get transferred to CPI eventually and It will rise showing the change in producers’ side. Effect will be more pronounced as logistic and power cost also increases.
• Movement in food articles indicate the stress at the producer sides which are likely to affect consumers in the coming month.
• From producer’s perspective watching WPI gives me an indication that in future if WPI is going up I would incur more cost or vice versa.