Why is the ongoing war between Russia and Ukraine of a direct concern for Indians? A primary reason is that the crisis has led to a rise in prices of goods and services as witnessed in the Wholesale Price Index (WPI) released for the month of March and April.
The inflation has spiked to a record high of 15.08 percent in April against 14.55 percent in March, data from the Department for Promotion of Industry and Internal Trade (DPIIT) showed Tuesday, 17 May.
What exactly is the WPI and how does it affect you? Here's all you need to know.
What is inflation rate?
The inflation rate is essentially the percentage at which prices are rising in an economy.
Inflation rates are calculated both on a year-on-year basis, and on month-on-month basis. But this is recorded on the basis of two indices – one which records the inflation in wholesale market and the other for retail.
What is WPI? How is it different from CPI?
The WPI measures the average change in prices of goods at the wholesale market. It takes into account the change in price of goods only, and does not include services.
The Consumer Price Index (CPI)-based inflation rate, on the other hand, calculates the average change in prices of goods and services at the retail market. It includes both goods and services.
Why should WPI and CPI be calculated separately?
This is because the price at which you buy a commodity in a wholesale market is different from when you buy the same from your neighbourhood shop or mall.
WPI data is published by the Office of Economic Adviser, Ministry of Commerce and Industry, while CPI data is published by the National Statistical Office (NSO), Ministry of Statistics and Programme Implementation (MoSPI).
Why exactly is the WPI increasing?
To put it simply – due to rising prices of manufactured goods, say experts. This, experts explain, is a direct impact of the Russia-Ukraine war.
"The high rate of inflation in March 2022 is primarily due to rise in prices of crude petroleum and natural gas, mineral oils, basic metals, etc owing to disruption in global supply chain caused by Russia-Ukraine conflict," the Centre had said.
Rising crude oil prices not only increases the current account deficit but also directly impacts the supply chain due to increased fuel prices. This means the factories have to pay more to manufacture certain number of finished goods, Deepanshu Mohan, Associate Professor, Director, Centre for New Economics Studies, Jindal University told The Quint.
"India does not buy all the required crude oil from Russia. However, due to ongoing crisis, there is a general panic buying among countries. This has disrupted the global supply chain," he explained.
"The Russia-Ukraine crisis has amplified the cost pressures and supply disruptions across the world. For India, the most dominant impact will be seen through crude oil prices. While reduced excise duties on petrol and diesel can offset some impact, they will not be sufficient if crude stays above $90 per barrel next fiscal. Core inflation is further expected to face pressure from companies passing on costs to retail prices to a greater extent next fiscal."CRISIL Chief Economist Dharmakirti Joshi told MoneyControl.
However, this is not the only reason. The after-effects of the pandemic-induced lockdowns and the current spike in COVID-19 cases in China's Shanghai – could also be the reason behind increased cost of production.
The general inflation, due to increased labour cost is also a factor, Mohan explained.
"Beyond the effects of the Russia-Ukraine war, the global oil production supply chain has already suffered from a prolonged disruption due to COVID-19-induced shutdowns, causing a catastrophic economic impact across the world."Deepanshu Mohan to The Quint
What is calculated under WPI and CPI?
It includes primary articles of goods produced at factory/mandi levels, fuel and power. While the weightage for fuel and power is given at 13.15 percent, the weightage for primary articles is 22.62 percent, and maximum weightage is given to manufactured goods at 64.23 percent.
The CPI is dominated with food prices, with lesser weightage on manufactured goods like clothes and footwear, or fuel prices.
For instance, if your food spending goes up, it would reflect more in the CPI. But say, the cost at which you buy mobile phones goes up, it will reflect more in the WPI.
The CPI too is at an all-time high with the inflation standing at 6.95 at a 17-month high for March 2022.
Does this mean that WPI does not directly affect how much I spend every day?
Wholesale prices are more volatile as they are driven by global factors. However, wholesalers do not always pass the burden to retailers.
In a CNBC report, senior journalist Latha Venkatesh explains that this is due to the contracts in place and also the expectation that price rise is temporary. This way, they would not be hurting the customer, and therefore the demand.
However, if the WPI soars for a prolonged period of time, manufacturers and wholesalers will eventually pass it on to consumers.
Therefore, rising WPI impacts consumers, but there is a delayed impact – if the prices of manufactured goods increase for a prolonged period of time.
Can the government do anything to control WPI?
According to CNBC, the government can control WPI through custom duties and Goods and Services Tax (GST). In case of steep rise in crude oil prices, the government can help moderate the price by cutting down on the custom duties.
But this too has limitations.