Understanding the Divergence in Inflation Indices : The Case of Wholesale and Retail Price Inflation in India

The gap between the Consumer Price Index (CPI) and Wholesale Price Index (WPI) is not always showing a definite trend. There are times when the gap between the indices is very high, and there are times when the gap is very low. This inconsistent relationship between the two indices is a cause of worry for policymakers. This paper analysed the divergence between both CPI and WPI indices from 2013 to 2020. The primary reason for this increased gap between the indices is the weight differences between food groups in both indices. Due to this significant weight difference, the contribution of each group to headline inflation also differs. Since the CPI food group has more weightage, a rise in food prices affects CPI inflation more than WPI inflation. And also, the inflation difference between the individual items in food groups shows the high intermediate cost and the high margin between the two indices. Another major cause of divergence between the two indices is the inflation of items exclusive to only one basket, i.e. Services inflation, which is exclusive to CPI and Manufactured product inflation which is exclusive to WPI. This paper also analysed how oil prices affect both indices. But due to the indirect effects of oil prices on both baskets, the effect of oil prices on the divergence between the indices remains inconclusive