GDP Deflator, CPI and WPI - Differences and Uses for UPSC

Definitions

GDP Deflator

The GDP deflator—also called the implicit price deflator—is an economy‑wide index used to convert nominal GDP into real GDP. It measures how prices of all goods and services produced domestically have changed relative to a base year. A value greater than 100 indicates rising prices since the base year, while a value below 100 signals deflation.

Consumer Price Index (CPI)

The Consumer Price Index tracks changes in retail prices of goods and services that households typically buy. The National Statistical Office compiles separate CPI series for rural and urban areas as well as a combined index. CPI includes goods such as food, clothing, fuel and housing along with services like education and health. It is the main index used by the Reserve Bank of India for its inflation‑targeting policy because it reflects cost‑of‑living changes faced by consumers.

Wholesale Price Index (WPI)

The Wholesale Price Index measures average price changes of goods traded in bulk at the producer level. Compiled by the Office of the Economic Adviser in the Ministry of Commerce and Industry, it covers only goods and uses weights based on production values. Until 2014 WPI was India’s headline inflation indicator, but the RBI has since shifted to CPI for monetary policy.

Formula and Base Year

Understanding how each index is calculated and the significance of its base year is crucial for interpreting the data correctly.

Formulas

• GDP deflator = (Nominal GDP ÷ Real GDP) × 100. Nominal GDP is the value of all goods and services produced at current prices, while real GDP is the value adjusted for price changes using constant prices. The ratio shows how much of the change in nominal GDP is due to price level movements.
• CPI = (Cost of basket in current period ÷ Cost of basket in base period) × 100. The basket contains a fixed set of goods and services based on household expenditure surveys. Weights represent the share of spending on each item.
• WPI = (Price of representative commodities in current period ÷ Price of representative commodities in base period) × 100. The basket includes selected goods traded at the wholesale level, and weights are derived from production data.

Base Years and Updates

Each index uses a base year to compare current prices with a historical reference. At present GDP and WPI use 2011‑12 and CPI combined uses 2012. Because the base years differ, cross‑comparison is difficult. The government plans to rebase GDP and WPI to 2022‑23 and CPI to 2024 to better capture digital and renewable sectors.

CPI and WPI weights reflect different patterns: CPI gives most weight to food and consumer services, while WPI gives most weight to manufactured goods. In contrast, the GDP deflator has no fixed basket; weights vary implicitly with the composition of output each year.

CPI vs WPI vs GDP Deflator: Key Differences

The table below compares the three indices across various dimensions. Such a comparison helps in understanding which index is suitable for a particular policy or analytical purpose.

The table shows that CPI focuses on retail goods and services, WPI covers wholesale goods only, and the GDP deflator is the broadest measure because it adjusts all domestic output for price changes.

For further reading, see our notes on GDP measurement, national income aggregates, types of inflation, national income accounting and monetary policy.

Uses and Limitations

GDP Deflator

Uses: The GDP deflator converts nominal GDP into real GDP and helps calculate real growth rates for the entire economy. It allows analysts to separate price effects from volume effects and to make long‑term comparisons across years. Policymakers also use it to deflate other macro aggregates such as tax revenue or public expenditure.

Limitations: Because the deflator is released only quarterly and uses implicit weights that vary with production patterns, it does not highlight the contribution of individual commodities or services. Revisions in GDP figures can change the deflator, and it is less useful for day‑to‑day cost‑of‑living analysis compared with CPI.

Consumer Price Index

Uses: CPI is the benchmark inflation measure for the RBI’s monetary policy. It guides interest‑rate decisions, signals trends in retail prices and is used to revise dearness allowance, wages and pensions. CPI data also helps design targeted subsidies and welfare programs by showing how inflation affects different population groups.

Limitations: CPI weights are based on periodic household surveys and may become outdated as consumption habits change. The fixed basket does not account for substitution between goods when relative prices shift. Different CPI series (for workers, agricultural labourers and rural labourers) have varying base years, making comparison difficult. CPI also fails to capture asset prices and often understates housing costs in rural areas.

Wholesale Price Index

Uses: WPI tracks wholesale price trends and highlights supply‑side inflationary pressures. It is used by industry for price escalation clauses, by analysts to deflate macroeconomic series such as industrial production and by policymakers to study how input costs might feed into consumer prices.

Limitations: WPI excludes services and therefore misses more than half of the modern economy. Its weights are based on production rather than consumption, so the index may not reflect household experience. High weight to manufactured products means factory price changes dominate the index. WPI does not include distribution margins, retail taxes or transport costs, so it tends to understate the price pressures faced by consumers.

For UPSC Prelims and Mains

For UPSC Prelims

• CPI measures retail inflation and includes goods and services. WPI measures wholesale prices and covers only goods.
• The GDP deflator equals nominal GDP divided by real GDP times 100; there is no fixed basket.
• The RBI targets 4 % inflation (±2 %) using CPI combined.
• WPI is dominated by manufactured goods, whereas CPI is dominated by food and consumer services.

For UPSC Mains

• Discuss how differences in the baskets and weights of CPI and WPI can lead to divergent inflation trends and policy choices, and why the RBI now uses CPI instead of WPI.
• Analyse the limitations of a single deflator and comment on debates around double deflation (separate price indices for outputs and inputs) for real sectoral growth.
• Evaluate the need for revising base years and incorporating new sectors such as digital services and renewable energy into price indices.
• Assess how low inflation affects savings, interest rates and fiscal policy, and how informal sector and regional price variations challenge the accuracy of national price indices.

Quick Facts

• Base years: GDP deflator and WPI use 2011‑12 as base; CPI combined uses 2012. New base years (2022‑23 for GDP and 2024 for CPI) are under preparation.
• Inflation targeting: RBI’s monetary policy framework targets 4 % CPI inflation with a tolerance band of ±2 %.
• Recent trends: Retail inflation fell to around 1.55 % in July 2025 while WPI inflation turned positive at about 0.13 % in September 2025.
• WPI composition: The three broad groups are primary articles, fuel & power and manufactured products.
• CPI variations: Separate CPI series exist for rural, urban, industrial workers and agricultural labourers, each with its own base year.

UPSC Previous Year Questions (Selected)

Below are a few representative questions from recent UPSC Prelims and Mains examinations to illustrate how the topic is tested.

1. Prelims Question (2015, paraphrased): Which one of the following statements is correct? (a) WPI measures changes in retail prices, (b) CPI includes services, (c) GDP deflator has a fixed basket, (d) CPI weights are based on production. Answer: Option (b); CPI includes services.
2. Prelims Question (2020, paraphrased): With reference to India, consider the following statements: 1. The weight of food in CPI is higher than that in WPI. 2. The RBI uses WPI for its inflation target. 3. WPI does not include taxes. Which of the statements given above is/are correct? Answer: Only statement 1 is correct.
3. Mains Question (2022, paraphrased): Discuss why the RBI adopted CPI as the nominal anchor for its monetary policy. Critically examine the limitations of WPI and GDP deflator as measures of inflation in India.

Practice MCQs

1. Which index covers services such as education, health, transport and recreation?
   A. GDP deflator
   B. CPI combined
   C. WPI
   D. Index of Industrial Production
   
2. In the WPI basket, which group has the highest weight?
   A. Primary articles
   B. Fuel and power
   C. Manufactured products
   D. Food articles
   
3. What does a GDP deflator value of 110 indicate?
   A. Prices have fallen by 10 % since the base year
   B. Nominal GDP is 10 % higher than real GDP
   C. Real GDP is 10 % higher than nominal GDP
   D. There is no change in the general price level
   
4. Which of the following statements is true regarding CPI and WPI?
   A. Both include services
   B. Both exclude taxes
   C. CPI gives higher weight to food than WPI
   D. WPI is compiled by the NSO
   
5. Why might the GDP deflator not be suitable for immediate policy response?
   A. It excludes services
   B. It is available only annually
   C. It is available quarterly and uses implicit weights
   D. It uses household consumption weights

Answer Key: 1-B; 2-C; 3-B; 4-C; 5-C.

Frequently Asked Questions

What is the main difference between CPI and WPI?

CPI measures retail price changes for goods and services purchased by households, while WPI measures wholesale price changes for goods traded in bulk and excludes services.

Why does the RBI use CPI rather than WPI for inflation targeting?

The RBI uses CPI because it better reflects the cost of living faced by consumers and includes services, whereas WPI covers only goods and therefore does not capture changes in household expenditure.

How often are CPI and WPI data released?

Both CPI and WPI are released monthly.

What does it mean when the GDP deflator is less than 100?

A deflator below 100 indicates that the general price level has fallen compared with the base year, meaning there has been deflation.

Will the base year for CPI and WPI change soon?

Yes. The government plans to update the base year for CPI to 2024 and for GDP and WPI to 2022‑23. The revised series are expected to be released around 2026, incorporating new consumption patterns and digital economy data.

How is CPI calculated for different groups like industrial workers or agricultural labourers?

Separate CPI series—CPI‑IW, CPI‑AL and CPI‑RL—are calculated using distinct baskets and base years that reflect the consumption patterns of industrial workers, agricultural labourers and rural labourers respectively. These indices are used to revise dearness allowance for employees and to frame rural wage policies.