What is Wholesale Price Index or WPI? How does it affect currency exchange rates?

17.04.18
5 minute read
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If you routinely deal with money in different currencies, you know that the price of goods affect a currency’s value. You’d also probably guess that the central bank of each country has no small part in regulating some of these consumer expenses. Wholesale price index (WPI) is part of that. WPI is one way economists use to measure price levels in a country. If you want to be able to predict whether your currency value will go up or down, you might want to keep an eye on WPI news.

Before you dive headfirst into WPI indices, however, you’ll probably want to know exactly what a WPI is, how’s it’s measured, and why it’s even measured that way. This guide should help you find answers to exactly those questions and more with a simple introduction to this index.

What is WPI? What does it stand for? And what does it measure exactly?

WPI, or wholesale price index, is the price of a certain class of goods at the wholesale level. But what exactly is wholesale level, you ask?

Factories and manufacturers produce a lot of goods. As such, they often sell to retailers in bulk at a lower price than if they would have sold each item individually. These retailers, usually stores and supermarkets, then sell these goods at a higher price to regular people - consumers.

The wholesale price is the price that retailers pay the original manufacturers. The retail price is the price that regular consumers pay these retailers for the same goods.

WPI is referencing the wholesale, not the retail, price of goods. It’s measuring the average price change at this wholesale level, usually expressed as a percentage or ratio.

How do you read a WPI figure?

Suppose you read somewhere that the WPI of country X is 120 in 2016. What would that mean?

WPI always starts with a base year for comparison. For the sake of the example, let’s say that, for country X, the base (comparison) year is 2012. That would mean that the total wholesale prices of goods for country X in 2012 is equalized to 100 points on the WPI scale. If the 2016 WPI was 120, that would mean that, in 2016, the wholesale prices in that country increased by 20% from the base year 2012.

What prices exactly does the WPI measure? Does it take into account prices of all the goods that consumers buy?

There are thousands, if not millions, of goods you can buy. It would be nearly impossible to measure the price changes of all the goods available every month, or even every year. Wholesale price index doesn’t measure all these goods, but, instead, a select number of goods. The measured goods are ones economic experts deem important to the country’s consumer households.

Sometimes the WPI’s group of measured goods is referred to as a basket or market basket.

This basket is an imaginary basket, of course. And what goes into this basket is goods considered important. Initially, when governments measured price changes, they only included a few dozen items in this basket like beef, leather, wool, corn, etc. These days, however, to match ever-changing consumer behavior and purchases, what’s in these market baskets has changed quite a bit.

If we hope for WPI to accurately track spending habits of everyday consumers, the contents of that basket is very important. The WPI should accurately track price changes of goods that local households actually care about. In smaller countries, only about 100-200 goods are calculated into the WPI. Whereas in larger countries, like the UK and the USA, thousands of products are included.

Why are wholesale prices measured at all?

So, why do you need to measure the wholesale prices of goods?

As you well know, prices change all the time. These variations could be related to many things - local politics, natural disasters, market fluctuations, foreign country policy changes, and more. Regardless of the reason, when the price of goods and services go up and then stay up, , it’s what experts call inflation.

Inflation is a bit complex and has wide-ranging effects on a country’s economy. Countries measure inflation in many ways. As such, there are different schools of thought among economists regarding the best way to measure it. One of the ways countries measures inflation is through the WPI.

Apart from inflation, however, WPI also is a good indicator of cost of living because it measures price trends that affect common consumers. A high WPI without an equivalent income rise would mean that local households are facing increasing financial pressure - higher prices without the money to pay for the difference. As such, economists would then predict a downturn in consumer spending.

Besides helping economists predict consumer spending, WPI also helps measure manufacturing sector health. A higher WPI may indicate, for example, that the manufacturing sector’s income is increasing. In general, this would be a sign of health for an economy.

Which means, apart from inflation there are multiple ways that the WPI index can assess a country’s economic health.

Do all countries use WPI to measure inflation? How is it different from Producer Price Index (PPI)?

As explained in the last section, many economists use WPI to measure inflation, but they also use other indicators such as the Consumer Price Index (CPI). Unlike WPI, CPI focuses on the prices of goods brought by consumers - retail prices - rather than the wholesale prices at which manufacturers sell the goods to retailers.

The United States began measuring wholesale prices through the WPI in 1902, but later switched to Producer Price Index (PPI) in 1978. Though the terminology is different, PPI actually measures the same kinds of goods at the same level as WPI does, so it’s essentially the same measure, but under a different term.

Investors are often interested in WPI figures to track the general health of manufacturing sector by noting wholesale price changes.

As an indicator of a country’s inflation, WPI is even more important because inflation rates are usually heavily factored into central bank currency interest rate decisions. A country’s central bank decisions in turn affects a currency’s value. Thereofe, WPI affects the value of a currency indirectly.

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