Indices of Inflation

There are several ways to measure inflation. On the basis of population coverage, the inflation indices are developed to understand the levels of inflation for certain sets of population such as consumers, producers, retailers, wholesalers, etc. Such indices are called

• Consumer Price Index (CPI),
• Producer Price Index (PPI),
• Wholesale Price Index (WPI), etc.

On the basis of items, the inflation indices are developed to understand the levels of inflation for certain sets / baskets of items. Since the prices of some items are more volatile than others like food and fuel, it might give conflicting signals to policymakers as the overall inflation could change because of a selected few goods. Hence, separate indices can be developed separating the volatile items from the main index.

The Wholesale Price Index (WPI) was main index for measurement of inflation in India till April 2014 when RBI adopted new Consumer Price Index (CPI) (combined) as the key measure of inflation.

Wholesale Price Index

Wholesale Price Index (WPI) is computed by the Office of the Economic Adviser in Ministry of Commerce & Industry, Government of India. It was earlier released on weekly basis for Primary Articles and Fuel Group. However, since 2012, this practice has been discontinued. Currently, WPI is released monthly.

Salient notes on WPI are as follows:

Base Year

Current WPI Base year is 2011-12=100.

Items

There are total 697 items in WPI and inflation is computed taking 6906 Price quotations. These items are divided into three broad categories viz.

(1) Primary Articles (117); (2) Fuel & power (16); and

(3) Manufactured Products (564)

Consumer Price Index

The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. Changes in the CPI are used to assess price changes associated with the cost of living; the CPI is one of the most frequently used statistics for identifying periods of inflation or deflation.

What is in the CPI

The CPI statistics cover professionals, self-employed, poor, unemployed and retired people in the country. People not included in the report are nonmetro populations, farm families, armed forces, and people serving in prison and those in mental hospitals.

The CPI represents the cost of a basket of goods and services across the country on a monthly basis. Those goods and services are broken into eight major groups:

• Food and beverages
• Housing
• Apparel
• Transportation
• Medical care
• Recreation
• Education and communication
• Other goods and services

Consumer Price Indices (CPI) released at national level are:

• CPI for Industrial Workers (IW)
• CPI for Agricultural Laborers (AL)/ Rural Laborers (RL)
• CPI (Rural/Urban/Combined).

While the first two are compiled and released by the Labour Bureau in the Ministry of Labour and Employment, the third by the Central Statistics Office (CSO) in the Ministry of Statistics and Programme Implementation.

In India, RBI uses CPI(combined) released by CSO for inflation purpose. Important notes on this index are as follows:

Base Year

Base year for CPI (Rural, Urban, Combined) is 2012=100.

Comparison of CPI before and after 2011

Number of Items

The number of items in CPI basket include 448 in rural and 460 in urban. Thus, it makes it clear that CPI basket is broader than WPI basket. The items in CPI are divided into 6 main groups as follows:

Difference Between WPI And CPI

• Wholesale Price Index measures inflation at each stage of production while Consumer Price Index measures inflation only at final stage of production.
• Wholesale Price Index is the basis for the economic deflation rate while consumer Price Index is the basis for the inflation rate.
• Wholesale price index is the middle point of the sum of all the goods bought by the traders whereas Consumer Price Index is the middle point of the sum of all the goods bought by consumers.
• The WPI is compiled and published by Office of the Economic Advisor on a weekly basis while the CPI is compiled and published by the Labour Bureau on a monthly basis in India.
• Wholesale Price Index (WPI) is based on the price prevailing in the wholesale markets or the price at which bulk transactions are made. The Consumer Price Index (CPI) is based on the final prices of goods at the retail level.
• There are only few countries that use WPI to calculate inflation rates whereas many nations have already shifted to using CPI.
• WPI is said to result an erroneous measure while CPI will describe actual cost of living and inflation rate more accurately.
• There are a lot of insignificant goods that are considered in WPI. CPI, on the other hand, has well-selected variables.

Other widely used price indices for calculating price inflation include the following:

• Producer Price Indices (PPIs) which measure average changes in prices received by domestic producers for their output. This differs from the CPI in that price subsidization, profits, and taxes may cause the amount received by the producer to differ from what the consumer paid. There is also typically a delay between an increase in the PPI and any eventual increase in the CPI. Producer price index measures the pressure being put on producers by the costs of their raw materials. This could be “passed on” to consumers, or it could be absorbed by profits, or offset by increasing productivity. In India and the United States, an earlier version of the PPI was called the Wholesale Price Index.
• Commodity Price Indices, which measure the price of a selection of commodities. In the present commodity price indices are weighted by the relative importance of the components to the “all in” cost of an employee.
• Core Price Indices: because food and oil prices can change quickly due to changes in supply and demand conditions in the food and oil markets, it can be difficult to detect the long run trend in price levels when those prices are included. Therefore, most statistical agencies also report a measure of ‘core inflation’, which removes the most volatile components (such as food and oil) from a broad price index like the CPI. Because core inflation is less affected by short run supply and demand conditions in specific markets, central banks rely on it to better measure the inflationary impact of current monetary policy.

Other common measures of inflation are:

• GDP Deflator is a measure of the price of all the goods and services included in gross domestic product (GDP). The US Commerce Department publishes a deflator series for US GDP, defined as its nominal GDP measure divided by its real GDP measure.
• Regional Inflation The Bureau of Labor Statistics breaks down CPI-U calculations down to different regions of the US.
• Historical Inflation: Before collecting consistent econometric data became standard for governments. and for the purpose of comparing absolute, rather than relative standards of living, various economists have calculated imputed inflation figures. Most inflation data before the early 20th century is imputed based on the known costs of goods, rather than compiled at the time. It is also used to adjust for the differences in real standard of living for the presence of technology.
• Asset Price Inflation is an undue increase in the prices of real or financial assets, such as stock (equity) and real estate. While there is no widely accepted index of this type, some central bankers have suggested that it would be better to aim at stabilizing a wider general price level inflation measure that includes some asset prices, instead of stabilizing CPI or core inflation only. The reason is that by raising interest rates when stock prices or real estate prices rise, and lowering them when these asset prices fall, central banks might be more successful in avoiding bubbles and crashes in asset prices.