A wholesale price index (WPI) is the price index of goods in the wholesale market. Transactions involve large amounts between the first seller and the next seller, but not retail. The first seller is the primary seller after the producer. So, the next seller is not a consumer, or in other words, this is the market after the producer market. It is often also known as the Wholesale Trade Price Index.
The difference with producer price index and consumer price index
Producer Price Index (PPI) is the price index of goods purchased by producers. These goods are raw materials, capital goods, and semi-finished goods. They use them to produce finished products.
Producers store them as production inputs stock. To make cars, for example, PPI will cover steel sheets in the warehouse as its components.
Conversely, the wholesales price index covers not only semi-finished goods or raw materials but also finished goods. Finished products will enter the retail market after going through several sales chains. Meanwhile, raw materials and semi-finished materials will move to producers. In several countries, such as the United States, the producer price index replaces the wholesale price index since it only counts the goods and services used as production inputs.
Finally, the Consumer Price Index (CPI) represents the prices of goods and services purchased by consumers. They are finished products that consumers buy in the retail market. Policymakers watch this statistic to monitor households’ purchasing power.
Wholesale price index components
In this article, we would cite Indonesia’s wholesales price index as an example. Its name is Indeks Harga Perdagangan Besar (IHPB).
Indonesia’s wholesale price index components comprise domestic goods sold in domestic and foreign markets, covering 503 commodities. Its calculation is based on the Laspeyres index. Items are classified into five groups:
- Agriculture
- Mining
- Manufacturing
- Import
- Export
Here is the historical data of the index:
Calculating inflation rate from a wholesale price index
Just like consumer price index inflation, we get wholesale index inflation by calculating the percentage change over time, usually on a year-on-year basis. Here the formula:
Inflation rate = [(WPIt / WPI(t-1)) – 1] * 100%
Let’s pull data from the table above, we calculate the Indonesia’s inflation rate in in 2018 as: [(164.5 / 159.0) -1] * 100% = 3.4%.
Why wholesale indexes are important?
WPI measures price changes at the wholesale level. It is an alternative to the consumer price index and producer price index in measuring the inflation rate. Policymakers can use it to check inflation in the supply chain of goods and services in the economy.
But, before calculating index changes from time to time and drawing conclusions, we must first sort out the components. The index component is often not uniform between countries.
As we discussed earlier, in some regions such as Indonesia, the wholesale index includes not only raw materials and production inputs but also finished goods. So, this will mislead information if we use it as a leading indicator of the consumer price index or producer price index. Of course, to be a leading indicator, we must separate its components into inputs and finished goods.
