Q. Consider the following statements:
1.The weightage of food in Consumer Price Index (CPI) is higher than that in Wholesale Price Index (WPI).
2.The WPI does not capture changes in the prices of services, which CPI does.
3.Reserve Bank of India has now adopted WPI as its key measure of inflation and to decide on changing the key policy rates.
Which of the statements given above is/are correct?
a) 1 and 2 only
b) 2 only
c) 3 only
d) 1, 2 and 3
Correct Answer : a) 1 and 2 only
Question from UPSC Prelims 2020 GS Paper
Explanation:
Weightage of Food in CPI and WPI
The weightage of food in the Consumer Price Index (CPI) is higher compared to the Wholesale Price Index (WPI). This is because the CPI focuses on measuring the changes in the price level of a basket of consumer goods and services purchased by households. Food constitutes a significant portion of consumer expenses, especially in countries like India. On the other hand, the WPI measures the changes in the price of goods at the wholesale level and has a broader basket that includes manufactured goods. As a result, the relative weightage of food is lower in the WPI compared to the CPI. The weightage of food in CPI is far higher (approx. 46%) than in WPI (approx. 24%).
Difference in Capturing Price Changes
The WPI does not capture changes in the prices of services, whereas the CPI does. The WPI is solely focused on goods and does not include services, which are a significant part of the economy. In contrast, the CPI includes both goods and services, making it a more comprehensive measure of inflation from the consumer’s perspective.
Role of WPI and CPI in Monetary Policy
Contrary to the statement, the Reserve Bank of India (RBI) primarily uses the CPI as its main measure of inflation for policy purposes. This includes decisions on changing the key policy rates. The CPI is considered a more accurate reflection of the retail inflation experienced by consumers and is thus used for monetary policy formulation.
Therefore, the correct answer is 1 and 2 only.