The Wholesale-level inflation — measured by the WPI (wholesale price index) — shot up to 7.39 per cent in March 2021 on a year-on-year basis. This is the highest wholesale inflation rate since October 2012.
- The reason behind this shot up is higher prices of crude oil and a surge in price levels of food items such as pulses and fruits.
- The WPI basically captures the average movement of wholesale prices of goods and is primarily used as a GDP deflator.
- The WPI inflation was expected to show a spike in March simply because of a low statistical base, as it was a mere 0.42 per cent in March 2020, but the surge is worrisome.
What is GDP deflator?
- The GDP deflator, a measure of inflation, is the ratio of the value of goods and services an economy produces in a particular year at current prices to that of prices that prevailed during the base year.
- It helps show the extent to which the increase in gross domestic product has happened on account of higher prices rather than increase in output.
- The deflator covers the entire range of goods and services produced in the economy — as against the limited commodity baskets for the wholesale or consumer price indices —hence it is considered as a more comprehensive measure of inflation.
Real GDP Vs Nominal GDP
- GDP price deflator measures the difference between real GDP and nominal GDP.
- Nominal GDP is the market value of goods and services produced in an economy, unadjusted for inflation–meaning all measurements are at current prices.
- Real GDP is nominal GDP, adjusted for inflation to reflect changes in real output.
- As a result, nominal GDP will most often be higher than real GDP in an expanding economy.
- To arrive at the real GDP we therefore need the GDP deflator.
- A zero nominal growth rate of GDP would mean the real rate of growth of GDP would be in negative territory.
WPI Vs CPI
- A consumer price index (CPI) measures changes over time in the general level of prices of goods and services that households acquire for the purpose of consumption.
- The wholesale price index (WPI) basket has no representation of the services sector and all the constituents are only goods whose prices are captured at the wholesale/producer level.
- The WPI tracks prices at the wholesale, or factory gate/mandi levels. Between the wholesale price and the retail price, the difference essentially is the former only tracks basic prices devoid of transportation cost, taxes and the retail margin etc. And that WPI pertains to only goods, not services.
