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    The Wholesale-Retail Price Battle

    By

    July 24, 2015

    The consumers have been caught in frenzy with the retail prices of food rising sharply, even with wholesale prices dipping to an all time low.

    THE PROBLEM OF RISE AND FALL:

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    There has been a rapid decline in the wholesale price index (WPI) causing it to turn “negative”. It’s what economists call “deflation”. This happens when prices are not rising at all, causing them to start falling.

    Wholesale prices have turned negative for the 8th consecutive month standing at -2.4%. We all know what inflation means, let’s have a look at what it’s reverse means. Deflation is a decrease in the general price level of goods and services. It occurs when the inflation rate falls below 0% (a negative inflation rate).

    Inflation reduces the real value of money over time; conversely, deflation increases the real value of money –the currency of a national or regional economy. This allows one to buy more goods with the same amount of money over time.

    So what’s the problem?

    The issue is that the now those who can afford it would buy in bulk as wholesale prices will reduce whereas those who can’t would have to buy less for more amount of money as retail prices have increased.

    WHAT IS WPI AND HOW TO CALCULATE IT:

    Wholesale Price Index (WPI) represents the price of goods at a wholesale stage i.e. goods that are sold in bulk and traded between organizations instead of consumers. WPI is used as a measure of inflation in some economies.

    A set of 435 commodities and their price changes are used for the calculation. The selected commodities are supposed to represent various strata of the economy and are supposed to give a comprehensive WPI value for the economy.

    WPI is calculated on a base year and WPI for the base year is assumed to be 100.  The data of wholesale prices of all the 435 commodities in the base year and the time for which WPI is to be calculated is gathered.

    Since WPI for the base year is assumed as 100, WPI for year X will become 100 + Price of commodity A in X year

    In this way individual WPI values for the remaining 434 commodities are calculated and then the weighted average of individual WPI figures are found out to arrive at the overall Wholesale Price Index. Commodities are given weight-age depending upon its influence in the economy.

    WPI= Price of commodity A in X year – Price of commodity A in (X-1) year / Price of (X-1) year × 100

    WHAT IS CPI AND HOW TO CALCULATE IT:

    The consumer price index (CPI) is a statistical estimate of the level of prices of goods and services bought for consumption by households. It measures changes in the price level of a market basket of goods and services used by households.

    The following method is by the government to calculate CPI:

    CPI for multiple items= Cost of CPI market basket at current period prices/ Cost of CPI market basket at base period prices × 100

    PAY MORE FOR PROTEIN-RICH FOOD:

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    Data shows inflation is getting entrenched in a clutch of protein-rich food products. For instance, the retail prices for meat and fish have increased from 5.1% in January this year to 5.7% in May and 7.1% in June. Milk prices jumped 7.8% last month, a slight decline from an 8.2% rise in June.  Pulses rose a huge 17.5% in June, compared to 11.4% in May.

    FUEL ON FIRE:

    Fuel prices have been on the upswing in the last few months, after falling sharply last year. Crude oil rose from $53.64 per barrel on 31 March to $63.82 by May-end.

    MIDDLE-INCOME GROUP CAUGHT IN THE CLUSTER:

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    This isn’t helping middle-income consumers because, unlike the WPI (Wholesale Price Index), the CPI (Consumer Price Index) is based on the consumption of an average Indian household.

    “The RBI now goes mainly by CPI. We should do away with WPI as it is practically useless for any public policy purpose,” said NR Bhanumurthy, an economist at the National Institute of Public Finance and Policy. The fall in wholesale prices isn’t helping consumers because it only captures 40% of the consumption basket, Bhanumurthy said.

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    The NDA government, ever since it got elected, was preaching to reduce prices. So much so that they have become either too high or too low. (Looks like the NDA government needs to take a class in economics!)

    The wide divergence between the two price indexes has raised questions on whether CPI is the right tool to measure inflation. Though, until the NDA government takes a decision on which tool to use it seems like the consumers have to keep facing the brunt.

    Views presented in the article are those of the author and not of ED.

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