Wholesale Price Index

Updated on April 10, 2024

Wholesale Price Index Meaning

The wholesale price index is an index that tracks the movement of the prices of the frequently traded goods at the wholesale level (before the retail level) in a territory or a jurisdiction. It measures the changes in the prices charged by producers before they reach retailers or consumers.

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Source: Wholesale Price Index (wallstreetmojo.com)

The reason for considering wholesale price lies in its being more easily accessible than the retail. The data collected from wholesale dealers are also more reliable than the retailers because they can be validated. Most importantly, the cost involved in getting a wholesale price is more effective in cost and also efficient in terms of time than the retail price index.

Key Takeaways

  1. A wholesale price index is a tool to track the price fluctuations of frequently traded wholesale goods.
  2. WPI is used to gauge inflation. Therefore, governments and financial regulatory authorities can use them for fiscal and monetary policies.
  3. On the other hand, the producer price index (PPI) includes industry-based, commodity-based, and commodity-based final.
  4. WPI merely considers the effects of a small sample of the products that make up the whole population of goods, cutting out on the service orientation.

Wholesale Price Explained

The wholesale price index number is a measure of any change in the prices of products before they go to the retailer. The change is compared on a month on month or year on year basis and is expressed as a percentage.

Given that the main aim is to conclude an reliable inflation rate to the whole territory, the countries must evaluate the best index that suits them. For instance, the wholesale price index in economics is used only in a few countries, mainly developing countries that are manufacturing dominant such as India. While the service sector dominant countries use PPI.

Yet another measure known as consumer price index (CPI) is also used by 150+ countries. However, it is also essential to determine the frequency in which the decision must be made using the indices.

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How To Calculate?

WPI and PPI can be calculated weekly and monthly, but CPI requires more inputs that are in most cases not readily available and hence would be released monthly. Countries may even tend to use multiple indices and conclude. In the end, what matters is how reliable and reasonable the inflation rate is calculated.

In the wholesale price index base year, the index is set at 100. The calculation is done based on the subsequent changes in price for the total output of goods.

The territory is an area under the jurisdiction of a state. A country usually calculates the wholesale price index (WPI), so the word territory would mean a country. However, the goods considered are frequently traded in the local market. Hence this would also depend upon the country that is calculating it. For instance, the United States may want to consider the export of its apples as good to form part of its basket of goods in the the calculation of wholesale price index, while countries in the middle east would want to consider dry fruits in its basket. So, this differs from territory to territory. 

Example

The WPI is calculated as mentioned earlier based on goods. Let us understand the same with an example.

In the USA, the price of an apple was $5 in 2011-12. In 2016-17, it increased to $6. So, the price has changed by $1. In terms of percentage (%) change it is (1$/5$) *100 = 20% over a period of 5 years.

The wholesale price index base year base year is 2011-12, and WPI is always assumed to be 100 for the base year. Hence, WPI for 2016-17 would be 100+20 =120.

In this way, all the goods considered by the territory are calculated. Then, a weighted average for the same is the WPI for the territory.

Uses

Components

The primary component would be the goods selected by the territory. The chosen interests must be diverse in terms of the industry, customer preferences, and the importance of it the territory. Having it construed to one aspect may not depict the right WPI as it does not represent the population.

Advantages

  • Represents the overall growth or decline of an economy based on which the reasons can be sought by conducting micro-level scrutiny.
  • The 5-year plan, as made by most countries, is based on the inflation rates calculated using the WPI.
  • It helps the business to make budgets affected by the likely inflation.
  • Comparing the goods of different industries helps the government draft policies to improve underperforming sectors and insight into various sectors to concentrate and build.
  • The industries can compare, analyze their performance with the other products and take industry-wide measures to improve and build upon.

Disadvantages

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For eg:
Source: Wholesale Price Index (wallstreetmojo.com)

WPI  Vs Consumer Price Index (CPI)

  • WPI is used to calculate the change in the wholesale price of goods, whereas the CPI measures the change in the retail cost of products.
  • The data for calculation of wholesale price index is collected from the wholesalers, whereas the data  fro CPI is taken from retailers.
  • The base year is not the same fro both of them.
  • The wholesale price index number only considers the price changes of goods, but CPI also finds the price changes of services.

Frequently Asked Questions (FAQs)

What is the difference between the Wholesale Price Index and CPI?

The wholesale price index measures the average change in the price of items at the wholesale level or in the wholesale market. The consumer price index is the price changes of products and services that a consumer must pay for purchasing a basket of commodities.

What happens when WPI rises?

Inflationary pressure in the economy is indicated by rising WPI, and vice versa. Therefore, the rate of WPI growth is used to gauge the economy’s degree of wholesale inflation.

WPI or CPI, which is higher?

WPI does not include services, which are experiencing lower inflation than goods but are not included in consumer price inflation.

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