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Difficulty: Very hardInflation Types, Price Indices (CPI, WPI), and Price Control Mechanisms

With reference to inflation dynamics and price indices in India, consider the following statements:

1. The Wholesale Price Index (WPI), released by the Office of Economic Adviser under the Ministry of Commerce and Industry, completely excludes services and assigns the highest weightage to Manufactured Products.
2. In the Consumer Price Index (CPI-Combined) compiled by the National Statistical Office (NSO), the 'Food and Beverages' group accounts for a weightage exceeding 45%, which is substantially higher than the food weightage in WPI.
3. Core Inflation measures underlying long-term price trends by excluding volatile components such as food and fuel items from Headline Inflation.
4. An increase in the Cash Reserve Ratio (CRR) by the Reserve Bank of India increases commercial bank liquidity, thereby accelerating demand-pull inflation in the short run.

Which of the statements given above are correct?

  1. 1, 2 and 3 onlyAnswer
  2. B
    2 and 4 only
  3. C
    1 and 4 only
  4. D
    1, 2, 3 and 4

Answer

The correct combination of statements is 1, 2 and 3 only.
The combination listing statements 1, 2 and 3 only is correct because WPI is compiled by the Office of Economic Adviser without service sector inclusion, CPI-Combined assigns 45.86% weight to Food and Beverages, and Core Inflation measures price changes excluding food and energy. Statement 4 is false because raising the Cash Reserve Ratio sucks liquidity out of the banking sector, mitigating rather than accelerating inflation.

Step-by-Step Solution

1
Evaluate Statement 1 regarding Wholesale Price Index (WPI) characteristics.
Statement 1 is correct. WPI is published by the Office of Economic Adviser, Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry. It tracks bulk transactions at the wholesale level, completely excludes services, and assigns the largest weight (~64.2%) to Manufactured Products.
Understanding publishing agencies and index basket compositions is essential for evaluating macro price indicators.
2
Evaluate Statement 2 regarding Consumer Price Index (CPI) weightages.
Statement 2 is correct. CPI-Combined (base year 2012=100) is published by NSO (MoSPI). 'Food and Beverages' carries a weight of 45.86% in CPI-Combined, whereas food items carry a significantly lower weight in the WPI basket (~24.4% combined).
CPI measures retail price changes directly impacting households, hence food carries a higher weight than in wholesale indices.
3
Evaluate Statement 3 regarding Core Inflation definition.
Statement 3 is correct. Core Inflation strips out food and fuel/energy groups because of their seasonal and temporary price shocks, capturing the steady macroeconomic inflation baseline.
Distinguishing headline inflation from core inflation helps central banks assess non-transitory price pressures.
4
Evaluate Statement 4 regarding Quantitative Monetary Policy tools.
Statement 4 is incorrect. Increasing the Cash Reserve Ratio (CRR) mandates commercial banks to deposit a larger fraction of their NDTL with the RBI without interest. This reduces available lendable liquidity in the banking system, curbing money supply and checking demand-pull inflation.
An increase in CRR acts as a contractionary monetary tool, dampening liquidity rather than expanding it.

Key Concept

Structural differences between CPI and WPI indices, Core Inflation definition, and central bank monetary policy tools.
Estimated Time:2m 0s
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Topics

Inflation Types, Price Indices (CPI, WPI), and Price Control Mechanisms