What Is a Wholesale Price Index?
A wholesale price index (WPI) is an index that measures and tracks the changes in the price of goods in the stages before the retail level – that is, goods that are sold in bulk and traded between entities or businesses instead of consumers. Usually expressed as a ratio or percentage, the WPI shows the included goods' average price change and is often seen as one indicator of a country's level of inflation.
Although many countries and organizations use WPIs in this way, many other countries, including the United States, use the producer price index (PPI) instead – a similar but more accurately named index.
Wholesale prices are what retailers pay manufacturers.
- A wholesale price index measures and tracks the changes in the price of goods before they reach consumers.
- WPIs, which report monthly to show the average price changes of goods, are usually expressed in ratios or percentages.
- A WPI is often seen as one indicator of a country's level of inflation.
- In 1978, the United States dropped the wholesale price index (WPI) and began using a more detailed producer price index (PPI) instead.
Understanding a Wholesale Price Index
Wholesale price indexes (WPIs) report monthly to show the average price changes of goods. They then compare the total costs of the goods being considered in one year with the total costs of goods in the base year. The total prices for the base year are equal to 100 on the scale. Prices from another year are compared to that total and expressed as a percentage of change.
To illustrate, imagine 2013 is the base year. If the total price of the goods under consideration in 2013 was $4,300, and the total for 2018 is $5,000, the WPI for 2018 with the base year of 2013 is 116 [5000- 4300 = 700/6 years], indicating an increase of 16 percent.
A WPI typically takes into account commodity prices, but the products included vary from country to country, and they are subject to change as needed to better reflect the current economy. Some small countries only compare the prices of 100 to 200 products, while large industrial countries like the United Kingdom and the United States tend to include thousands of products in their WPIs.
The United States includes commodities at various stages of production, and as a result, many items are counted more than once. For example, the index includes cotton prices for raw cotton, cotton yarn, cotton gray goods, and cotton clothing. In addition, the United States also includes crude materials, consumer goods, fruit, grains, and apples, and it creates indexes for nearly 100 subgroups.
WPI is a leading indicator of the manufacturing sector.
The Wholesale Price Index Versus the Producer Price Index
The United States first began measuring its economy with a wholesale price index in 1902. But in 1978, it changed the name of the measured index to PPI. Based on data collected by the Bureau of Labor Statistics, the PPI relies on the same calculation formula as the WPI, but it includes the prices of services as well as physical goods and eliminates the component of indirect taxes from prices.
The PPI also actually consists of three indexes, covering different stages of production – industry-based, commodity-based, and commodity-based final demand-intermediate demand. The use of all three helps minimize the bias toward double-counting that is inherent in the WPI, which doesn't always segregate intermediate and final products.