Wholesale Price Index (WPI) came in today at a record high of 12.94% for May. It did not really jar anyone out of any stupor; it was just putting a numeric to what we all already knew and are living.

Rising price of manufactured goods – a direct consequence of raw material prices going up, the unreal fuel prices and not to mention the lower base effect. In May 2020, WPI inflation was at (-) 3.37%. During May, inflation in fuel and power basket spiked to 37.61% v/s 20.94% in April while that of manufactured products was at 10.83% v/s 9.01% (MoM).

All these together have pushed the WPI to where it is today. Is this a one-off event? Nope! We could see the WPI only going up some more as there is going to be no let-up on the commodity prices front -we are talking about a super cycle, remember?

And fuel prices? That’s going to stay. The Govt has tasted blood; people are paying even when taxes of both Central as well as state as so high; so that will continue as money needs to be collected for mitigating the pandemic effect.

RBI does not really pay much attention to the WPI; its benchmark, rightly so, is the Consumer Price Index (CPI), which is expected to come in today evening. All projections relating to inflation are currently done in terms of CPI, doing away completely with all use of WPI. So, if WPI is not being used, is it of any use at all?

Currently, the WPI is used as a GDP deflator. This is the ratio of GDP at current prices to GDP at constant prices multiplied by 100. WPI is used for conversion of GDP and GVA from current prices to constant while those not covered in the WPI basket, mainly, services, are deflated by WPI to calculate real GDP of the services sector.

The WPI is going to undergo some change. Its current base year, which is at 2011-12 is soon going to be changed to 2017-18. This is being done to bring in more items to the WPI basket – from the current 697 to 1176 under the new base. Having more items gives a much better picture of the structural changes in the economy.

Then again the question remains – do we need to migrate or maybe introduce another new index to get a much better picture – the Producer Price Index or PPI. This index measures the average change in the sale prices for the entire domestic market of raw goods and services; the entire gamut of imports is avoided in the PPI. The PPI looks at goods and services bought by people directly from the primary producer, which is akin to the WPI but also includes those bought indirectly from retail sellers or purchased by the producers themselves. In the USA, PPI includes mining, manufacturing, agriculture, fishing, forestry, natural gas, electricity, construction, waste, and scrap materials.

Thus more than the WPI, it will be the PPI which will give better leads for the CPI. While the CPI directly indicates impact by consumer demand, the PPI indicates input inflation faced by producers as higher production costs are passed on to the retailers and consumers. And that’s what we need – an index which is a true measure of output.

There are murmurs that the Govt is working on a comprehensive PPI basket and plans to eventually shift from WPI to PPI. For now, lets be content with the proposed change in the bas year – one step at a time.