The Tale of Two Indexes: CPI and WPI

In the bustling kingdom of Econland, two powerful advisors helped the king track the rising and falling costs of goods: Sir CPI (Consumer Price Index) and Lord WPI (Wholesale Price Index).

The king, worried about inflation affecting his subjects and traders, often turned to these two advisors to understand the kingdom’s economy. However, while both measured inflation, their approaches were vastly different.

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Chapter 1: The People's Guardian – Sir CPI

Sir CPI was tasked with keeping an eye on the common people—the farmers, merchants, blacksmiths, and tailors—who bought goods for daily use.

He rode through the streets, visiting homes, markets, and shops, tracking the prices of essential goods and services that people used every day:
✅ Food & Beverages – Fruits, vegetables, milk, bread
✅ Housing – Rent for homes
✅ Clothing & Footwear – Woolen coats, silk robes
✅ Healthcare – Medicines, doctor visits
✅ Transportation – Carriages, horses, oil for lamps

Formula for CPI:

$$CPI = \left( \frac{\text{Current Cost of Basket}}{\text{Base Year Cost of Basket}} \right) \times 100$$

The basket represented the typical spending pattern of the kingdom’s citizens.

🔹 Example: If the basket of goods cost 100 gold coins last year and 110 gold coins this year, then:

$$CPI = \left( \frac{110}{100} \right) \times 100 = 110$$

This meant a 10% inflation rate, signaling that the cost of living was rising.

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Chapter 2: The Merchant’s Watchdog – Lord WPI

Unlike Sir CPI, Lord WPI didn’t care about what people paid at the market. Instead, he roamed the warehouses, factories, and ports, tracking wholesale prices of raw materials and goods before they reached consumers.

He focused on:
✅ Raw Materials – Iron, copper, coal
✅ Manufactured Goods – Textiles, machinery
✅ Fuel & Power – Oil, gas, electricity

Lord WPI calculated inflation before the goods reached the consumer market, giving an early warning of price fluctuations.

Formula for WPI:

$$WPI = \left( \frac{\text{Current Cost of Wholesale Basket}}{\text{Base Year Cost of Wholesale Basket}} \right) \times 100$$

🔹 Example: If wholesale goods cost 100 gold coins last year and 120 gold coins this year, then:

$$WPI = \left( \frac{120}{100} \right) \times 100 = 120$$

This meant a 20% rise in wholesale prices, suggesting manufacturers were paying more, which could lead to higher retail prices.

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Chapter 3: The Clash of Perspectives

One day, the king noticed a problem: Sir CPI and Lord WPI often reported different inflation rates!

🔸 If WPI increased but CPI remained stable → Manufacturers bore the cost, but retailers didn’t pass it to consumers yet.
🔸 If CPI increased but WPI remained stable → Retailers were raising prices despite stable wholesale costs, possibly due to higher demand.

The king realized that:
✔ CPI reflected the cost of living for citizens.
✔ WPI reflected the cost of production for businesses.

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Chapter 4: The Kingdom’s Decision

To make informed policies, the king used both indices:
🔹 When CPI rose too fast, he reduced taxes and subsidies on essentials.
🔹 When WPI spiked, he controlled fuel prices and provided incentives to manufacturers.

By balancing the insights of Sir CPI and Lord WPI, Econland ensured a stable economy where both citizens and businesses thrived.

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Moral of the Story:

Both CPI and WPI are essential for understanding inflation, but they serve different purposes. While CPI measures consumer-level inflation, WPI tracks wholesale-level price changes.

[Economics]