Previous Year Question
Consider the following statements:
The weightage of food in Consumer Price Index (CPI) is higher than that in Wholesale Price Index (WPI).
The WPI does not capture changes in the prices of services, which CPI does.
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?
1 and 2 only
2 only
3 only
1, 2 and 3
Correct Answer: A
Detailed Solution
Statement 1 is correct
Food carries a substantially higher weight in CPI than in WPI.
In the CPI Combined series with base year 2012, Food and Beverages has a weight of 45.86%. Its weight is 54.18% in Rural CPI and 36.29% in Urban CPI.
In comparison, the combined WPI Food Index carries a weight of approximately 24.38% in the WPI series with base year 2011-12. It combines Food Articles under Primary Articles and Food Products under Manufactured Products.
This difference arises from the distinct purposes of the two indices:
CPI measures prices paid by households at the retail level.
Food constitutes a comparatively large share of Indian household consumption expenditure.
WPI measures prices of goods at the wholesale or producer level and reflects the production and wholesale-trade structure.
Therefore, Statement 1 is correct.
Statement 2 is correct
The WPI basket covers goods under three major groups:
Primary Articles
Fuel and Power
Manufactured Products
It does not include services such as banking, education, healthcare, transport services, communication and personal services.
CPI covers goods as well as several services, including:
Housing
Education
Health
Transport and Communication
Household Goods and Services
Recreation and Amusement
Personal Care and Effects
Consequently, changes in service prices can be reflected in CPI but not in WPI. Statement 2 is therefore correct.
Statement 3 is incorrect
RBI has not adopted WPI as its key measure of inflation. Under India’s Flexible Inflation Targeting framework, the inflation target is expressed in terms of headline CPI Combined inflation.
The inflation target was fixed at 4%, with a tolerance band of ±2 percentage points, producing a permissible range of 2% to 6%.
While deciding policy rates such as the Repo Rate, the Monetary Policy Committee considers CPI inflation projections along with growth, liquidity, demand and supply conditions. Therefore, the reference to WPI in Statement 3 is incorrect.