What Is WPI Inflation: Causes, Impact and Calculation

WPI inflation can be caused by a variety of factors, which include:

• Imbalance in the supply and demand chain
• Changes or alterations in government policies
• Increase in the cost of production
• Currency exchange rate fluctuations
• Increase in the money supply
• Increase in government spending
• Changes in the level of economic activity
• Increase in rates of interest
• Unforeseen natural disasters or crop failures
• Increase in taxes, duty fees, and freight charges
• Higher demand for goods and services
• Unfavourable global economic conditions

Policymakers, businesses, and investors closely monitor the WPI inflation since it can have a significant impact on the country's overall economy. Here are a few points stating what happens when there is an upsurge in the WPI inflation rate in a country:

• High inflation leads to higher rates of interest, thus, slowing down economic growth.
• It can also lead to a decrease in purchasing power for consumers.
• High inflation can also make exports less competitive in the global market.
• Businesses may also experience challenges in terms of planning and budgeting.

On the other hand, low WPI inflation may often indicate a weak economy and may lead to a decrease in overall investment and consumption.

WPI inflation is an important measure to monitor as it can provide insight into changes in prices and trends in the economy. In addition, it aids in making monetary and fiscal policy decisions.

Here is how WPI inflation is calculated:

Step 1: The Office of the Economic Adviser determines the basket of goods and services.

Step 2: This basket includes primary articles, fuel, power, and manufactured products.

Step 3: Prices are collected from various sources like markets, factories, and mines.

Step 4: Finally, the WPI inflation rate is calculated by determining the average of these prices.

With a better understanding of what WPI inflation is, policymakers, businesses, and investors can make informed decisions and anticipate future economic trends. WPI inflation is a good indicator that reflects the overall price trends in the economy.  The Government and financial institutions closely monitor it to make monetary and fiscal policy decisions.