Wholesale Price Index Meaning

The definition above may be quite vague in terms of:

  • What is a territory and what good are considered?Why are wholesale prices considered and not retail?

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 a good to form part of its basket of goods in the WPI calculation, while countries in the middle east would want to consider dry fruits in its basket. So, this differs from territory to territory. 

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.

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Wholesale Price Index (wallstreetmojo.com)

Wholesale Price Index Calculated

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 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 and Importance

  • As earlier mentioned in the definition, WPI is a measure of inflation. Hence the governments and the Banking regulatory authority can use them for fiscal and monetary policiesMonetary PoliciesMonetary policy refers to the steps taken by a country’s central bank to control the money supply for economic stability. For example, policymakers manipulate money circulation for increasing employment, GDP, price stability by using tools such as interest rates, reserves, bonds, etc.read more.It helps to forecast the future selling price of a product affected due to inflation; hence the business can estimate the demand for the product at the inflated concerned price and make suitable modifications to the production and distribution strategies and plans.The foreign exchange rates are affected due to inflation, hence they can measure purchasing power parityPurchasing Power ParityPurchasing power parity formula depicts the variation in the exchange rate between the currencies of two different nations. It is evaluated as the fraction of a particular goods’ cost in one country to that in the second country.read more.As earlier mentioned in the definition, WPI is a measure of inflation. Hence, governments and the banking regulatory authority can use them for fiscal andAs earlier mentioned in the definition, WPI is a measure of inflation. Hence the governments and the Banking regulatory authority can use them for fiscal and monetary policiesMonetary PoliciesMonetary policy refers to the steps taken by a country’s central bank to control the money supply for economic stability. For example, policymakers manipulate money circulation for increasing employment, GDP, price stability by using tools such as interest rates, reserves, bonds, etc.read more.

Components of Wholesale Price Index (WPI) and its Selection

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

Difference Between WPI and Producer Price Index (PPI)

  • PPI is considered to be a more robust method than WPI. In PPI, components related to services are also considered. The computation of PPI is similar to that of PPI. The PPI is usually used by countries that are more services oriented. USA and UK are the countries majorly using the PPI index.PPI components are majorly broken down into three segments: industry-based, commodity-based, and commodity-based final and intermediate demand. This essentially also reduces the double counting in the case of WPI.

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

  • WPI considers the impact of only a sample of goods that represent the entire population of goods. Always an inherent riskAn Inherent RiskInherent Risk is the probability of a defect in the financial statement due to error, omission or misstatement identified during a financial audit. Such a risk arises because of certain factors which are beyond the internal control of the organization.read more of business exists.Since it represents the population, the inflation calculated as a whole using the weighted averageWeighted AverageThe weighted average formula is simply summing up the products of each value with its respective weightage. Here, more significance is given to the weightage of the values rather than the variables themselves.read more may not be accurate.Different countries use different products to calculate the WPI. Therefore, it is not always comparable to other countries.It does not serve as the right benchmark for countries dominated by the service sector.

Conclusion

Given that the main aim of the entire exercise is to conclude at an inflation rate that is reliable to the whole territory, the countries are required to evaluate the best index that suits them. For instance, the Wholesale Price Index is used only in a few countries, mostly developing countries that are manufacturing dominant such as India. While the service sector dominant countries use PPI.

Yet another measure known as consumer price indexConsumer Price IndexThe Consumer Price Index (CPI) is a measure of the average price of a basket of regularly used consumer commodities compared to a base year. The CPI for the base year is 100, and this is the benchmark  point.read more (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. For example, 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.

This has guided the wholesale price index (WPI) and its meaning. Here we discuss WPI calculation and examples, use, importance, advantages, and disadvantages. You can learn more about from the following articles –

  • GDP DeflatorHeadline InflationDemand-Pull InflationInflationary Gap