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A wholesale price index (WPI) and a consumer price index (CPI) are both economic measures used by countries to track inflation. WPI and CPI establish a baseline for the prices of a standard collection of goods sold to different segments of the market and track the changes in price for those goods across time. The percentage rise in prices over the baseline price indicates the rate of inflation. Countries typically track both WPI and CPI, but only use one index as the official measure of inflation.
Inflation is the rise in prices for goods and services over time when a buyer's income remains the same. It reflects how much a buyer can buy today with a certain amount of money, compared to what he could have bought at some time in the past. If his money buys less today than in past years, prices have become inflated. Countries track inflation and try to reign it in, because inflation effects the standard of living within the country and the overall health of the economy. A decrease in purchasing power results in less buying and an increase in poverty levels.
Countries use economic indices to track inflation. Two of the most common indices are the WPI and CPI. WPI tracks buying from manufacturers to merchants. CPI tracks buying from merchants to consumers. Each index selects a bucket of goods to follow that represents a cross-section of the marketplace.
For example, the WPI in India tracks 435 different commodities across five industries. Each individual government decides which commodities should comprise the country's WPI and CPI, so the bucket of goods that are tracked are not necessarily the same across economies. Price changes in the WPI are typically tracked weekly, while changes in the CPI are usually tracked monthly.
Although both the WPI and CPI can measure inflation, they do it in different ways and produce different results. Most advanced economies, such as in the US, UK and Japan, use a CPI. Certain developing countries, such as India, use a WPI to track inflation. This choice is a function of the way these economies work.
In mature economies, the most important point of inflation is at the consumer level. CPI is the best indicator because it tracks prices at the point that goods reach consumers at the final stage of production. Comparatively, developing economies often need to track inflation at each stage of production. For example, a country's economy can rely heavily on exports, so a measure of inflation, such as a WPI, that tracks prices from the wholesaler to the merchant might be more relevant than consumer prices.