Page 206 - economic_survey_2021-2022

180 Economic Survey 2021-22

Divergence between WPI and CPI based Inflation rates

5.23 The year-on-year inflation rate based on the WPI and the CPI-C has recorded a divergence
since June 2019. Between June 2019 and February 2021, wholesale inflation was lower than
retail inflation, while between March 2021 and December 2021, wholesale inflation remained
above the retail inflation. WPI inflation during the current year was higher than the CPI but
there was also a significant widening of the divergence (Figure 16). In December 2021, WPI
based inflation rate was 8 percentage points higher than the retail inflation. This trend raises the
potential question: Why is CPI inflation diverging from WPI inflation with WPI inflation being
higher than CPI inflation?

5.24 Consequent to the impact of the COVID-19 pandemic, production activity remained muted
in 2020-21 and global crude oil prices reached record lows due to lack of demand. Therefore,
the WPI based inflation rate touched a low of 1.3 per cent in 2020-21. With economic activity
picking up in 2021-22 and edging up of global crude oil prices, the low base of 2020-21 led
to WPI inflation reaching a peak of 14.2 per cent in November 2021 and 12.5 per cent during
April-December 2021 (as against 0.04 per cent during April-December 2020-21). Therefore, the
high WPI based inflation rate in 2021, is largely attributable to the low base of the preceding
year. On the other hand, retail inflation that had remained high during 2020-21 due to supply
chain disruptions and high food inflation, moderated in 2021-22 on account of effective supply
side management, resulting in a divergence between WPI and CPI based inflation.

Figure 16: Divergence between YoY inflation in CPI and WPI

16
14
Inflation Rate (yoy) (per cent) 8 6 4 2
12
10

-2
-4 0 Feb-19 Apr-19 Jun-19 Aug-19 Oct-19 Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20 Feb-21 Apr-21 Jun-21 Aug-21 Oct-21 Dec-21
-6
CPI(YoY) WPI(YoY)

Source: NSO, MoSPI and OEA, DPIIT
5.25 While the base effect could be one of the reasons for the divergence in the WPI and
CPI, the current divergence in the two indices can also be explained through the conceptual
difference in their purpose and design and the price behavior of the different components of the
two indices. CPI reflects the buying behaviour of consumers, derived based on the household
consumption patterns using NSS Household Consumer Expenditure Survey, and reflects price
movements at the retail level. On the other hand, WPI based inflation rate is based on the
share of the respective items in total wholesale transactions in the economy at the first point
of sale. Therefore, while the weights of items in CPI-C are based on the consumption pattern