UPSC Prelims 2020 Question:

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?

Explanation:

• A Consumer Price Index (CPI) is designed to measure the changes over time in general level of retail prices of selected goods and services that households purchase for the purpose of consumption. Food and beverages have a weightage of around 45 percent in CPI.
  
  
• The Wholesale Price Index (WPI) measures the price of a representative basket of wholesale goods. In India, wholesale price index is divided into three groups: Fuel and Power (about 13 percent), Primary Articles (about 23 percent) and Manufactured Products (about 64 percent). Food is a component of Primary articles. It means weightage of food in CPI is more than that of WPI. So, statement 1 is correct.
  
  
• WPI keeps the track of goods only. Since services cannot be purchased in a wholesale manner, they are not tracked by WPI. CPI on the other hand takes into account both goods and services. So, statement 2 is correct.
  
  
• Based on the recommendations of the Urjit Patel Committee, Reserve Bank of India has adopted CPI as the key measure of inflation. It will be used a reference for India’s monetary policy. So, statement 3 is not correct.
  

Therefore, option (1) is the correct answer.

Subject: Economics | Inflation