GDP Deflator vs CPI vs WPI – Concepts, Coverage & Measurement

UPSC Economics Smart-Prep • GS III • Prelims + Mains

1. Why Do We Need Multiple Measures of Inflation?

Inflation cannot be captured by a single index because different agents in the economy face different prices. Households face retail prices, producers face wholesale prices, and the economy as a whole experiences changes in prices of all goods & services. Hence India uses CPI, WPI, and GDP Deflator.

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2. The Three Indices – Overview Map

This diagram summarises the basic nature of each index: what they cover, who uses them, and what prices they track.

graph TB
  A[Inflation Measures]:::root --> B[CPI]:::node
  A --> C[WPI]:::node
  A --> D[GDP Deflator]:::node3

  B --> B1[Retail Consumer Prices]:::note
  C --> C1[Wholesale Producer Prices]:::note
  D --> D1[Prices of all final goods & services in GDP]:::note

  classDef root fill:#D4EFDF,stroke:#1E8449,color:#145A32;
  classDef node fill:#EBF5FB,stroke:#2874A6,color:#1B4F72;
  classDef node3 fill:#FEF9E7,stroke:#B7950B,color:#7D6608;
  classDef note fill:#F5F6F7,stroke:#B3B6B7,color:#424949;

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3. What is CPI? (Consumer Price Index)

CPI measures inflation at the point where consumers purchase goods. It is the most relevant index for analysing the cost of living. The basket includes food, housing, clothing, transport, education, health, miscellaneous services.

CPI Variants in India

• CPI-Combined (Headline inflation)
• CPI-Rural
• CPI-Urban
• CPI-AL (Agricultural Labourers)
• CPI-RL (Rural Labourers)
• CPI-IW (Industrial Workers)

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4. What is WPI? (Wholesale Price Index)

WPI measures price changes at the level of wholesale markets and is dominated by manufactured goods, fuel, and primary articles. It excludes services.

• Heavily influenced by commodity prices
• No direct reflection of consumer costs
• Useful for tracking producer prices

Weight distribution (approx.): Primary Articles 22.6%, Fuel & Power 13.1%, Manufactured Products 64.2%.

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5. What is GDP Deflator?

GDP Deflator is the most comprehensive measure of inflation because it covers the entire GDP basket — all goods and services produced domestically.

• Includes goods + services
• Includes both consumption and investment goods
• Automatically updates its basket every year (unlike WPI/CPI)
• Best for macroeconomic analysis

However, it is released only annually or quarterly, so it is not useful for month-to-month tracking.

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GDP Deflator vs CPI vs WPI – Comparison, Usage & UPSC Traps

UPSC Economics Smart-Prep • GS III • Prelims + Mains Enrichment

6. Comparative View – GDP Deflator vs CPI vs WPI

This table gives a one-glance comparative framework of the three indices on coverage, weights, base, and usage. Very useful for prelims MCQs.

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7. When Do CPI, WPI and GDP Deflator Diverge?

These indices can move in different directions depending on what is driving inflation: food, fuel, services, or traded goods. UPSC often tests understanding of such divergence.

• Food price shock: CPI (heavier food weight) rises more than WPI.
• Global commodity boom: WPI spikes due to fuel and metals, CPI rises moderately.
• Services inflation: CPI and GDP Deflator rise, WPI less affected.
• Tax/subsidy changes: GDP Deflator changes even if real output is stable.

graph TB
  A[Divergence of Indices]:::root --> B[Food Shock]:::node
  A --> C[Commodity Shock]:::node
  A --> D[Services Inflation]:::node
  A --> E[Tax Changes]:::node

  B --> B1[CPI up more]:::note
  C --> C1[WPI up more]:::note
  D --> D1[CPI and Deflator up]:::note
  E --> E1[Deflator moves strongly]:::note

  classDef root fill:#D4EFDF,stroke:#1E8449,color:#145A32;
  classDef node fill:#EBF5FB,stroke:#2874A6,color:#1B4F72;
  classDef note fill:#F5F6F7,stroke:#B3B6B7,color:#424949;

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8. Which Index for What? – Policy & Analytical Uses

Each index has a distinct role in India’s policy and analytical framework.

A. CPI – For Households & Monetary Policy

• Best measure of cost of living.
• Used by RBI for inflation targeting (4% ± 2%).
• Important for wage indexation, DA for government employees, social sector schemes.

B. WPI – For Producers & Industry

• Tracks producer price trends.
• Useful for understanding imported inflation in commodities.
• Important for contracts, escalation clauses in infrastructure projects.

C. GDP Deflator – For Macro Analysis

• Used to convert nominal GDP into real GDP.
• Shows how much of GDP growth is due to price change vs real output change.
• Helpful for long-term trend analysis & inter-country comparisons.

graph TB
  A[Choice of Index]:::root --> B[CPI]:::node
  A --> C[WPI]:::node
  A --> D[GDP Deflator]:::node

  B --> B1[Households, RBI]:::note
  C --> C1[Industry, contracts]:::note
  D --> D1[Macro growth analysis]:::note

  classDef root fill:#D4EFDF,stroke:#1E8449,color:#145A32;
  classDef node fill:#EBF5FB,stroke:#2874A6,color:#1B4F72;
  classDef note fill:#F5F6F7,stroke:#B3B6B7,color:#424949;

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9. UPSC Traps & Conceptual Pitfalls

UPSC questions often try to confuse candidates on coverage, use, and construction. Key traps to watch out for:

• “WPI includes services” → False
• “CPI is more comprehensive than GDP Deflator” → False
• “GDP Deflator uses a fixed basket like CPI” → False
• “RBI targets WPI inflation” → False (it targets CPI-Combined)
• “CPI directly captures producer prices” → False (it captures consumer prices)

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10. Smart Summary – Final Table & Diagram

Use this table and diagram for last-minute revision before prelims.

graph TB
  A[Inflation Indices Summary]:::root --> B[CPI]:::node
  A --> C[WPI]:::node
  A --> D[GDP Deflator]:::node

  B --> B1[Retail index]:::note
  C --> C1[Wholesale index]:::note
  D --> D1[Macro index]:::note

  classDef root fill:#D4EFDF,stroke:#1E8449,color:#145A32;
  classDef node fill:#EBF5FB,stroke:#2874A6,color:#1B4F72;
  classDef note fill:#F5F6F7,stroke:#B3B6B7,color:#424949;

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