In October 2019, India's wholesale price index (WPI)-based inflation dropped to a 40-month low at 0.16 per cent. The same month, the consumer price index (CPI) based inflation rose to 4.6 per cent, the highest in 16 months. Is the variance between the two inflation indicators something intriguing?Not really.
The divergence is a normal trend because we are not talking about the same set of products and their price variations when we look at both the indices. Even when same products are looked at, the weightage they carry in these indices are not the same.
In short, the two sets of economic indicators are not strictly comparable. A close look at both the indices may provide a clearer picture of the status of Indian economy.
The wholesale price index is measured by changes happening in three broad sectors - primary articles, fuel and power and manufactured products. The CPI product categorisation is sharper and is bracketed under food and beverages, pan, tobacco and intoxicants, clothing and footwear, housing, fuel and light and a miscellaneous category.
The weightage given to each category in WPI and CPI is different. It explains why a price increase in certain category can impact one index more than the other.
For instance, the food and beverage category alone carries 54.18 per cent weightage in CPI as against 24.38 per cent weightage given to food items (a combination of food articles from the primary articles group and food products from the manufactured products group).
The rate of food inflation based on WPI food index in fact rose 7.65 per cent in October, whereas the consumer food price index-based inflation rose 7.89 per cent, more or less the same.
Due to the difference in weightage, the impact of the price increase in food articles in WPI got nullified due to the decline in growth in other sectors, while in CPI it was too big a component to get subdued.
An investor note from the brokerage Motilal Oswal notes that the CPI-based inflation at 4.6 per cent in October 2019 was entirely driven by higher food inflation.
"Food inflation (excluding non-alcoholic beverages and prepared meals) was at 7.8 per cent year-on-year in October 2019 compared to 5.1 per cent a month ago.
All items within food, except 'meat and fish,' exhibited higher inflation in the month. The highest contribution came from 'vegetables', where inflation accelerated to a 21-month high of 26.1 per cent YoY in October 2019 from 15.5 per cent in the previous month.
Inflation also accelerated to 3.1 per cent in 'milk and products' and 2.2 per cent in 'cereals and products'. The aforementioned three items together constitute 22 per cent weight in the CPI basket. Separately, 'fuel and light' remained in deflation, and 'pan, tobacco and intoxicants' inflation declined during the month.
The core inflation was at record low and inflation in 'housing' dropped to 4.6 per cent from 4.8 per cent a month ago, while that in 'miscellaneous' items fell to 3.5 per cent from 4.5 per cent.
The only item that held core at its level was 'clothing and footwear', where inflation rose to 1.7 per cent in October 2019 from 1 per cent in the previous month," the note explains.
Commenting on the WPI inflation, Aditi Nayar, Principal Economist, ICRA says that the fall in the WPI inflation in October 2019 was narrower than they expected, as a jump in food inflation to nearly 10 per cent offset the further weakness in the core WPI.
"The sequential dip in the WPI inflation in October 2019 was led by core items, fuel and power, minerals, and crude petroleum and natural gas, whereas inflation for primary food and non-food articles, and manufactured food products recorded an uptick".
In other words, even though headlines may suggest that CPI-based inflation and WPI-based inflation are indicating divergent trends, it is far from true.