THE GIST of Editorial for UPSC Exams : 15 November 2019 (Never the twain shall meet: Why gap between WPI and CPI based inflation widening (Mint)

Never the twain shall meet: Why gap between WPI and CPI based inflation widening (Mint)

Mains Paper 3 : Economy
Prelims level : Wholesale Price Index
Mains level : Gap between WPI and CPI based inflation widening

Context

•  The retail inflation as measured by the Consumer Price Index (CPI) touched a 16 month high at 4.62% in October.
•  The wholesale price inflation measured by the Wholesale Price Index (WPI) is at the verge of entering the negative territory.
•  The gap between the two is currently the widest in two years.

Wholesale price inflation

•  Wholesale price inflation dropped to 0.16% as compared to 0.33% a month ago.
•  Most analysts expect WPI inflation to decline further in coming months, weighed by a base effect.
•  Wholesale price deflation would signal that producers lack pricing power and may be offering discounts at a time consumer expenditure has dropped to an 18 quarter low in the April-June period.
•  Factory output data for September released on Monday also showed that production of both consumer durables and consumer non-durables contracted during the month, while overall output shrank to its lowest level at least in seven years.

Why is retail inflation then touching new heights?

•  It is mainly because CPI and WPI are two different sets of indicators with varied compositions.
•  Manufactured items have the highest weight of 64.23% in WPI, while fuel and primary articles have 13.15% and 22.62% weight, respectively.
•  On the other hand, food and beverages have the highest weight of 54.18% in CPI, while services sectors such as health, education and amusement have a combined weight of 27.26%.
•  So the supply shortage of onions and tomatoes due to floods and unseasonal rains has a disproportionate impact on the overall retail inflation than wholesale price inflation.
•  On the other hand, a spike in crude oil prices or rise in other commodity prices would drive WPI based inflation up faster than the CPI based inflation.

Way forward

•  However, retail food inflation often mimics the wholesale food inflation as the price rises are first reflected in the wholesale market than in the retail market.
•  In October, retail food inflation quickened to 7.89% following similar print in wholesale price inflation in September at 7.47%.
•  The WPI based inflation has lost the primacy that it once enjoyed in economic policy debates when RBI signed the monetary framework pact with the Centre in 2015.
•  Now, the RBI is mandated to only achieve the medium-term target for CPI inflation of 4% within a band of two percentage points.

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Prelims Questions:

Q1. According to a new study Makgadikgadi-Okavango was the ancestral home region of all living humans. It is located in:
A. Botswana
B. Peru
C. Brazil
D. Chile

Answer: A
Mains Questions:
Q1. Why is retail inflation then touching new heights?