Points to Remember:
- CPI vs. WPI: Understanding their composition and usage.
- Weighting of food in CPI and WPI.
- Inclusion of services in CPI and WPI.
- RBI’s inflation targeting framework and its choice of index.
Introduction:
The Consumer Price Index (CPI) and the Wholesale Price Index (WPI) are two crucial measures of inflation in an economy. CPI tracks changes in the prices of goods and services purchased by consumers, while WPI measures changes in the prices of goods at the wholesale level. The choice of which index to use as a primary inflation indicator has significant implications for monetary policy decisions. This question assesses the accuracy of three statements comparing CPI and WPI, particularly concerning their composition and the Reserve Bank of India’s (RBI) approach.
Body:
Statement (I): The weightage of food in Consumer Price Index (CPI) is higher than that of the Wholesale Price Index (WPI).
This statement is generally correct. CPI reflects the spending patterns of households, and food constitutes a significant portion of household expenditure, particularly in developing economies. Therefore, food items typically have a higher weight in CPI compared to WPI. WPI focuses on wholesale prices, where the proportion of food items relative to other goods might be lower. The exact weightings vary across countries and over time depending on consumption patterns and economic structure.
Statement (II): The WPI does not capture changes in the prices of services, which CPI does.
This statement is correct. WPI primarily focuses on the prices of goods traded in wholesale markets. It traditionally excludes services. CPI, on the other hand, includes the prices of both goods and services consumed by households, providing a broader picture of inflation affecting consumers. The inclusion of services in CPI is crucial because the service sector constitutes a significant portion of many modern economies.
Statement (III): RBI has now adopted WPI as its key measure of inflation.
This statement is incorrect. While the RBI historically used WPI as a key inflation indicator, it has shifted its primary focus to CPI for inflation targeting. The RBI’s monetary policy decisions are now largely guided by the CPI inflation rate, reflecting its commitment to maintaining price stability for consumers. The shift reflects a global trend towards using CPI as a more comprehensive measure of inflation’s impact on households.
Conclusion:
In summary, statement (I) and (II) are correct, while statement (III) is incorrect. The CPI and WPI serve different purposes, with CPI offering a more comprehensive measure of inflation relevant to consumers, while WPI reflects wholesale price changes. The RBI’s adoption of CPI as its key inflation measure underscores the importance of considering the impact of inflation on household purchasing power. Going forward, it is crucial to continuously refine both indices to reflect evolving consumption patterns and economic structures. This ensures that monetary policy remains effective in achieving price stability and supporting sustainable economic growth, aligning with the broader goals of inclusive and holistic development. The continued monitoring and improvement of these indices are essential for effective economic management.
Therefore, the correct answer is (C) (I) and (II) only.
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