Measuring Inflation in India (CPI/WPI)

Rate of inflation 

It is the rate of change of general price level which is measured as follows: 

Rate of inflation(year X)= price level(year X)- price level(year X-1)/ PL(year X-1)* 100 

It is measured on the basis of price indices  

1. WPI 
2. CPI 
3. GDP deflator 

A price index is a weighted average of the prices of a number of goods and services. 

CPI/ Headline inflation 

• For micro-level analyses 
• index of prices of a given basket of commodities which are bought by the representative consumer.  
• generally expressed in percentage terms.  
• We have two years under consideration – one is the base year, the other is the current year. We calculate the cost of purchase of a given basket of commodities in the base year. We also calculate the cost of purchase of the same basket in the current year. Then we express the latter as a percentage of the former. This gives us the Consumer Price Index of the current year vis-´a-vis the base year. 
• Consumers in India have wide differentiation of their choice and purchasing powers. Hence different baskets of goods and indexes are devised. A common CPI is not yet arrived at, but efforts are being made. 
  1. CPI-IW(2001 base): for government employees. Wages and salaries revised based on this and DA announced twice a year 
  2. CPI-AL(1986-87 base): for revising minimum wages. Govts are more vigilant on this segment as 75% of their incomes is spent on food and are the most vulnerable. 
  3. CPI-RL(1986-87 base):  overlap between AL and RL because same people work but in different seasons. 
• Released by CSO 
• Since 2011, CPI-U, CPI-R and CPI-C are being released along with the above 4. The new series has base year of 2011-12 and six groups. Latest addition is ‘pan, tobacco and intoxicants’ which was earlier a part of ‘food , beverages and tobacco’ 
• CPI-R: F&B> miscellaneous> fuel and light> clothing footwear> P,T&I–no housing 
• CPI-U: F&B> miscellaneous> housing>clothing and footwear> lighting and fuel>P,T 
• CPI-C: F&B>miscellaneous >housing> F&L> C&F> P,T&I 

WPI 

• Used for macro-level policy making 
• Office of economic adviser, DIPP. 
• 697 items with 2011-12 as base.  
• The weightage is consistent with the structure of the economy: manufactured goods(64)>primary articles(23)> fuel and power(13) 
• Revision in 2010 led to more items, wider coverage, more quotations helping in disseminating more realistic and reliable data,facilitating better DM and policy intervention 
• WPI for manufactured good released monthly, for the other two it is weekly. 
• It is worth noting that many commodities have two sets of prices. One is the retail price which the consumer actually pays. The other is the wholesale price, the price at which goods are traded in bulk.  
• These two may differ in value because of the margin kept by traders.  
• Goods which are traded in bulk (such as raw materials or semi-finished goods) are not purchased by ordinary consumers. Like CPI, the index for wholesale prices is called Wholesale Price Index (WPI).  

GDP deflator 

• In the calculation of real and nominal GDP of the current year, the volume of production is fixed. Therefore, if these measures differ it is only due to change in the price level between the base year and the current year.  
• The ratio of nominal to real GDP is a well known index of prices. This is called GDP Deflator. Thus if GDP stands for nominal GDP and gdp stands for real GDP then,  GDP deflator = GDP/gdp . 
• Sometimes the deflator is also denoted in percentage terms. In such a case: Deflator =  GDP/ gdp × 100 per cent.  

•  The GDP deflator is1,650/ 1,100 = 1.50 (in percentage terms this is 150 per cent). This implies that theprice of bread produced in 2001 was 1.5 times the price in 2000. Which is true because price of bread has indeed gone up from Rs 10 to Rs 15. Like GDP deflator, we can have GNP deflator as well. 

Difference between deflator and cpi&wpi 

Notice CPI (and analogously WPI) may differ from GDP deflator because 

1. The goods purchased by consumers do not represent all the goods which are produced in a country. GDP deflator takes into account all such goods and services. 
2. CPI includes prices of goods consumed by the representative consumer, hence it includes prices of imported goods. GDP deflator does not include prices of imported goods. 
3. The weights are constant in CPI – but they differ according to production level of each good in GDP deflator. 

Base effect 

It refers to the impact of last year’s inflation of a corresponding period on present year’s inflation in the same period. If the price index had risen at a high rate, despite having the same level of price increase this year, the index shows lower inflation rate. 

PPI 

• Used in countries like USA  
• In India too, there is a need to switch to PPI from WPI 
• Here, only basic prices are used while taxes, trade margins and transport costs are excluded. 
• Better index because price changes at primary and intermediate stages can be tracked. 
• Gives a better idea about the trends in inflation 

Housing price index 

• Developed by NHB and index is called NHB Residex 
• NHB is 100% subsidiary of RBI 
• Base year: 2012-13  
• Quarterly yearly basis for 50 cities 
• Aim of bringing transparency in real estate sector. Gives an idea of 
  • Price quotations-high/low 
  • Processing loan applications by banks-realistic claims 
  • Realistic price index for buyers 
  • Calculation of NPAs in housing segment