Monetary Policy Committee Notifications

Why policymakers prefer targeting of Retail Inflation over Wholesale Inflation?


From UPSC perspective, the following things are important :

Prelims level: Wholesale and Retail (Consumer) Inflation

Mains level: Inflation control in India

The wholesale inflation in India has grown by double digits. This is the highest year-on-year increase recorded in any month since the start of the 2011-12 data series.


  • It is surprising policymakers are not looking as concerned as the inflation figures show.
  • The Finance Ministry has largely focused on the trend in retail inflation — or the inflation rate at the level of retail consumers.
  • It is not just the policymakers within the government who prefer to focus on retail inflation but also the RBI.

Wholesale and Retail (Consumer) Inflation

  • The wholesale and retail (consumer) inflation rates are based on the wholesale price index (WPI) and the consumer price index (CPI), respectively.
  • In other words, we make two separate indices — one each for wholesale prices and retail prices — and see how the index values have gone up in a particular month as against the same month last year.
  • The percentage change is the rate of inflation.
  • The CPI-based inflation data is compiled by the Ministry of Statistics and Programme Implementation (or MoSPI) and the WPI-based inflation data is put together by DPIIT.

The tables alongside detail how the two indices — WPI and CPI — differ in their composition. There are two key differences.

[A] Wholesale Price Index

Component Weight (in %) Inflation rate (in %);

Nov 2021

All Commodities 100.00 14.23
Primary Articles 22.62 10.34
Fuel & Power 13.15 39.81
Manufactured Products 64.23 11.92

[B] Consumer Price Index

Component Weight (in %) Inflation rate (in %); 

Nov 2021

General Index 100.00 4.91
Food and beverages 45.86 2.60
Pan, tobacco and intoxicants 2.38 4.05
Clothing and footwear 6.53 7.94
Housing 10.07 3.66
Fuel and light 6.84 13.35
Miscellaneous (services) 28.32 6.75

A Comparison

(1) Manufactured Goods Vs. Food Items

  • WPI is dominated by the prices of manufactured goods while CPI is dominated by the prices of food articles.
  • As such, if the year-on-year increase in the prices of food articles is subdued, as is the case at present, chances are that the overall (also called headline) retail inflation will be within reasonable bounds.
  • In WPI, if manufactured products are getting costlier at the wholesale level then that would likely spike wholesale inflation regardless of how food prices are doing at the wholesale level.

(2) Accounting Service

  • Two, WPI does not take into account the change in prices of services. But CPI does.
  • If services such as transport, education, recreation and amusement, personal care etc. get significantly costlier, then retail inflation will rise but there will be no impact on wholesale price inflation.

Why do policymakers prefer targeting retail inflation instead of wholesale inflation rate?

  • RBI’s limitations: RBI is the monetary authority that has little ability to control food and fuel prices. Ex: raising the repo rate (rate at which RBI lends money to banks) is unlikely to contain the price of vegetables if any disruptions have led to a sudden spike.
  • Non-commodity Inflation: Wholesale inflation does not capture price movements in non-commodity-producing sectors like services, which constitute close to two-thirds of economic activity in India.
  • Large revisions in WPI: Movements in WPI often reflect large external shocks and as such, the wholesale inflation rate is often subject to large revisions.

Arguments in favour of CPI-based inflation targeting

  • Commodity basket: A crucial reason why CPI-based inflation could not be ignored is the fact that it has almost 57% dominance of food and fuel prices.
  • Affecting general public: Since most people use retail inflation as a way to arrive at their real earnings, and use it for wage negotiations etc., it makes more sense for policymakers,
  • Public faith: The choice of CPI establishes ‘trust’ viz., economic agents note that the monetary policy maker is targeting an index that is relevant for households and businesses.
  • Inflation affecting people: True inflation that consumers face is in the retail market. It is for this reason that almost all central banks in big economies use CPI as their primary price indicator.

Impact of Wholesale inflation on Retail

  • The Urjit Patel committee analysed the relationship between WPI and CPI based on monthly data from January 2000 to December 2013 — a total of 14 years.
  • When they looked at the impact of an increase in WPI-food inflation on CPI food inflation, they found it to be “significant”.
  • It stated that higher food inflation in wholesale markets leads to an increase in retail food inflation “till two months”.
  • An increase in retail food inflation leads to a corresponding increase in WPI-food inflation.


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