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Wholesale Price Indiex / Consumer Price Index in India  /  CPI and WPI in India /  How Inflation is Measured in India


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by

Rajesh Goyal 

 

 

 

How Inflation is Measured in India:

 

 

Inflation is usually measured based on certain indices.   Broadly, there are two categories of indices for measuring inflation i.e. Wholesale Prices  and Consumer Prices.   There are certain sub-categories for these indices.  

 

What is an Index Number :

 

An Index number is a single figure that shows how the whole set of related variables has changed over time or from one place to another.  In particular, a price index reflects the overall change in a set of prices paid by a consumer or  a producer, and is conventionally  known as a Cost-of-Living index or Producer's Price Index as the case may be.

 

Price Indexes / Indices used in India :

 

In India we use five major national indices for measuring inflation or price levels.  

 

 

(A) The Wholesale Price Index (base 1993-94) is usually considered as the headline inflation indicator in India.  

 

 

(B) In addition to  Whole Price Index ( WPI ),  there are four different consumer price indices which are used to assess the inflation for different sections of the labour force.  These are discussed in more details later on.

 

(C) In addition to above five indices,  the GDP deflator as an indicator of inflation is available for the economy as a whole and its different sectors, on a quarterly basis

 

 

Now let us discuss the above indices used in India to measure inflation in detail to understand these better.

 

 

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Wholesale Price Index (WPI) :  

 

 

This index is the most widely used inflation indicator in India.  This is published by the Office of Economic Adviser, Ministry of Commerce and Industry.  WPI captures price movements in a most comprehensive way.   It is widely used by Government, banks, industry and business circles.   Important monetary and fiscal policy changes are linked to WPI movements.  It is in use since 1939 and is being published since 1947 regularly.   We are well aware that with the changing times, the economies too undergo structural changes.   Thus, there is a need for revisiting such indices from time to time and new set of articles / commodities are required to be included based on current economic scenarios.   Thus, since 1939, the base year of WPI has been revised on number of occasions.    The current series of Wholesale Price Index has 2004-05 as the base year.   Latest revision of WPI has been done by shifting base year from 1993-94 to 2004-05 on the recommendations of the Working Group set upwith Prof Abhijit Sen,, Member, Planning Commission as Chairman for revision of WPI series.    This new series with base year 2004-05 has been launched on 14th September, 2010.  A brief on the historical development of this WPI is given below : -

 

Base Year Year of Introduction No of Items in Index No of Price Quotations
Week ended 19th August 1939 1942 23 23
End August 1939 1947 78 215
1952-53 (1948-49 as weight base) 1952 112 555
1961-62 July 1969 139 774
1970-71 January 1977 350 1295
1981-82 July 1989 447 2371
1993-94 April 2000 435 1918
2004-05 September 2010 676 5482

 

Earlier, the concept of wholesale price covered the general idea of capturing all transactions carried out in the domestic market.  The weights of the WPI did not correspond to contribution of the goods concerned either to value - added or final use.   In order to give this idea a more precise definition, it was decided to define the universe of the wholesale price index as comprising as far as possible all transactions at first point of bulk sale in the domestic market.

 

 

Click Here to Get More Details About:

 

 

Methodology, Basket and Weights Adopted for Revised Index Numbers of  Wholesale Prices in India with Base Year 2004-05 = 100

 

 

 

 

Click Here to View :

 

WPI and Inflation Data upto 2010 based on new series with base year 2004-05

 

 

 

Thus the latest WPI  has a basket of 676 items with 5482 quotations.     The major criticism for this index is that 'the general public does not buy at the wholesale level',   thus WPI does not give the actual feeling of the amount of pressure borne by the general public.   However,  the increase in wholesale prices does affect the retail prices and as such give some feel of the consumer prices.

 

 

  • Consumer Price Index (CPI)
  • The CPI measures price change from the perspective of the retail buyer. It is the real index for the common people. It reflects the actual inflation that is borne by the individual.  CPI is designed to measure changes over time in the level of retail prices of selected goods and services on which consumers of a defined group spend their incomes.   Till January 2012, in India there were only  following four CPIs compiled and released on national level.    (In some countries like UK, Malaysia, Poland it is also known as Retail Price Index).
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    (1) Industrial Workers (IW) (base 2001),

    (2) Agricultural Labourer (AL) (base 1986-87) and

    (3) Rural Labourer (RL) (base 1986-87)

    (4) Urban Non-Manual Employees (UNME) (base 1984-85),

 

 

The first three are compiled by the Labour Bureau in the Ministry of Labour and Employment, and the fourth is compiled by Central Statistical Organisation (CSO) in the Ministry of Statistics and Programme Implementation.   These four CPIs reflect the effect of price fluctuations of various goods and services consumed by specific segments of population in the country.   These indices did not encompass all the segments of the population and thus, did not reflect the true picture of the price behaviour in the country as a whole.  

 

Some of the Data for 2012 for above indices :

 

  WPI (All commodities)     WPI - Inflation Rate CPI (IW) CPI - AL - Point to Point CPI - Rural Labourers CPI - RL - Point to Point
Base Period      2001=100 Point Inflation 1986-87=100 Inflation 1986-87=100 Inflation
Period                
Jan-12 158.70 7.23 198.00 5.32 618.00 4.92 619.00 5.27
Feb-12 159.30 7.56 199.00 7.57 621.00 6.34 623.00 6.68
Mar-12 161.00 7.69 201.00 8.65 625.00 6.84 626.00 7.19
Apr-12 163.50 7.50 205.00 10.22 633.00 7.84 634.00 8.01
May-12 163.90 7.55 206.00 10.16 638.00 7.77 640.00 8.11
Jun-12 164.20 7.25 208.00 10.05 646.00 8.03 648.00 8.54
Jul-12 164.80 6.87 212.00 9.84 656.00 8.61 658.00 8.94

 

 

New Series of CPI Started in 2012

 

Therefore, there was a strong feeling that there is a need for compiling  CPI for entire urban and rural population of the country to measure the inflation in Indian economy based on CPI.    Thus, now Central Statistics Office (CSO) of the Ministry of Statistics and Programme Implementation has started compiling a new series of CPI for the

 

(a) CPI for the entire urban population viz CPI (Urban);

(b) CPI for the entire rural population viz CPI (Rural)

(c) Consolidated CPI for Urban + Rural will also be compiled based on above two CPIs

 

These  would reflect the changes in the price level of various goods and services consumed bythe Urban and rural population.   These new indices are now compiled at State / UT and all India levels.

 

The CPI inflation series is wider in scope than the one based on the wholesale price index (WPI), as it has both rural and urban figures, besides state-wise data. The new series, with 2010 as the base year, also includes services, which is not the case with the WPI series.   However, this new series will become comparable only in 2013 when the data for 2012 will also be available for comparison.

 

A comparison of this new series with WPI is given below :-

 

  WPI CPI - New Series wef Feb 2012
Base Year 2004-05 2010
Elemenetary Items 676 200 (Weighted items)
Weightage o Food products (%) 243 49.71
Weightage of Energy products (%) 14..91 9.49
Weightage of Miscellaneous Items (%) Services not included 26.31
     

 

Some of the Data Released under this New Series :

 

Period

Rural - CPI  / Annual Inflation - Prov

Urban - CPI /  Annual Inflation -  Prov.

Combined  - CPI / Annual Inflation (Prov.)

May 2012

119.1

117.1

118.2

June 2012

117.5

118.5

119.6

July 2012

122.6

9.76%

119.9

10.0%

121.4

9.86%

 

  • Producer Price Indexes (PPI)  
  • These are indices that measure the average change over time in selling prices by producers of goods and services. They measure price change from the point of view of the seller. Majority of OECD countries measure inflation based on Producer Price Indiex (PPI) while only some others use WPI.  Countries like Japan, Greece, Norway and Turkey use WPI.   Already WPI has been replaced in most of the countries by PPI due to the broader coverage provided by the PPI in terms of products and industries and the conceptual concordance between PPI and system the national account.   PPI is considered to be more relevant and technically superior compared to one at wholesale level.   However, in India we are still continuing with WPI.
  • Cost-of-living indices (COLI):  
  • This is different from CPI.   This index aims to measure the effects of price changes on the cost of achieving a constant standard of living (i.e. level of utility or welfare) as distinct from maintaining the urchasing power to buy a fixed consumption basket of good and services.   Maintaining a constant standard of living does not imply continuing to consume a fixed basket of goods and services. A COLI allows for the fact that households who seek to maximize their welfare from a given expenditure can benefit by adjusting their expenditure  patterns to take account of changing relative prices by substituting goods that have become relatively cheaper, for goods that have become relatively dearer.   The use or preference for a particular goods may also change.  
  • .
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In the long run, the various PPIs, WPIs and the CPI show a similar rate of inflation. In the short run PPIs often increase before the WPI and CPI. Investors generally follow the CPI more than the PPIs. In India WPI is used instead of CPI.

 

 

In News Recently :

 

What is Core Inflation : The concept is used to estimate the inflation by excluding food and energy prices from the basket of goods and services that represents a typical household's consumption.   In mid 2012, RBI Governor threw up the conundrum posed by this "Core"inflation by saying "In our economy, where food constitutes nearly 50% of consumption basket and fuel has a weight of 15%, can a measure of inflation that excludes them can be called "Core".   He suggested that India should move towards developing and using a Producer Price Index (PPI) to gauge inflation more accurately as wholesale price index does not capture the price movement of services and is a hybrid of consumer and lproducer lprice quotes. 

 

 

 

Click Here to know  :  What is Inflation, What is Deflation, What is Stagflation, What is Hyperinflation etc.

 

 

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Sources : Various reports of committees of GoI