Awareness Article # 9 INFLATION

What is inflation?
Inflation rate of a country is the rate at which prices of goods and services
increase in its economy. It is an indication of the rise in the general level of
prices over time. Since its practically impossible to find out the average change
in prices of all the goods and services traded in an economy (which would give
comprehensive inflation rate) due to the sheer number of goods and services
present, a sample set or a basket of goods and services is used to get an
indicative figure of the change in prices, which we call the inflation rate.
India uses the Wholesale Price Index (WPI) to calculate and then
decide the inflation rate in the economy.
Most developed countries (!, S, "#$#% and &'I%#) use the Consuer
Price Index (CPI) to calculate inflation.
What is WPI?
($I is the inde) that is used to measure the change in the a!era"e #rice
le!el o$ "oods traded in wholesale ar%et. In India, a total of *+*
commodities data on price level is tracked through ($I which is an indicator of
movement in prices of commodities in all trade and transactions. It is also the
price inde) which is available on a weekly basis with the shortest possible time
lag only two weeks. ,he Indian government has taken ($I as an indicator of
the rate of inflation in the economy.
What is CPI?
&$I is a statistical time-series measure of a weighted average of prices of a
specified set of goods and services #urchased &' consuers. It is a price
inde) that tracks the prices of a specified basket of consumer goods and
services, providing a measure of inflation.
How WPI is calculated?
In this method, a set of ()( coodities and their price changes are used for
the calculation. ,he selected commodities are supposed to represent various
strata of the economy and are supposed to give a comprehensive ($I value for
the economy.
($I is calculated on a base year and WPI $or the &ase 'ear is assued to
&e *++. ,o show the calculation, lets assume the &ase 'ear to &e *9)+. ,he
data of wholesale prices of all the *+* commodities in the base year and the
time for which ($I is to be calculated is gathered.
.et/s calculate WPI $or the 'ear *9,+ for a particular commodity, say wheat.
#ssume that the price of a kilogram of wheat in 01+2 3 4s 5.+5 and in 0162 3
4s *.02
,he ($I of wheat for the year 0162 is,
($rice of (heat in 0162 7 $rice of (heat in 01+2)8 $rice of (heat in 01+2 ) 022
i.e. (6.10 5.75)/5.75 x 100 = 6.09
Since ($I for the base year is assumed as 022, ($I for 0162 will become 022
9 *.21 3 02*.21.
In this way individual ($I values for the reainin" ()- coodities are
calculated and then the weighted average of individual ($I figures are found
out to arrive at the overall (holesale $rice Inde). &ommodities are given
weight-age depending upon its influence in the economy.
How is Inflation rate calculated?
If we have the ($I values of two time :ones, say, beginning and end of year,
the inflation rate for the year will be,
(($I of end of year 7 ($I of beginning of year)8($I of beginning of year ) 022
For exa#le, ($I on "an 0st 0162 is 02*.21 and ($I of "an 0st 0160 is
021.+; then inflation rate for the year 0160 is,
(021.+; 7 02*.21)802*.21 ) 022 3 <.=;> and we say the inflation rate for the
year 0160 is <.=;>.
Since ($I figures are available every week, inflation for a particular week is
calculated based on the above method using ($I on the later week and ($I on
the previous week. This is how we "et wee%l' in$lation rates in India.
Characteristics of WPI
?ollowing are the few characteristics of (holesale $rice Inde)
0. ($I uses a sample set of *+* commodities for inflation calculation
;. ,he price from wholesale market is taken for the calculation
<. ($I is available for every week
=. It has a time lag of two weeks, which means ($I of the week two weeks
back will be available now.
Disadvantages of WPI
?ollowing are the disadvantages of (holesale $rice Inde)
0. India is the onl' a/or countr' that uses a wholesale inde) to measure
inflation. Most countries use the &$I as a measure of inflation, as this
actually measures the increase in price that a consumer will ultimately
have to pay for.
;. It pointed out that ($I does not properly measure the e)act price rise an
end-consumer will e)perience because, as the same suggests, it is at the
wholesale level.
<. ,he main problem with ($I calculation is that more than 022 out of the
*+* commodities included in the Inde) have ceased to be important from
the consumption point of view.
=. India constituted the last ($I series of commodities in 011<-1=@ but has
not updated(&'A&! .#,AS,) it till now that economists argue the Inde)
has lost relevance and can not be the barometer to calculate inflation.
5. ($I is supposed to measure impact of prices on business. But India uses
it to measure the impact on consumers. Many commodities not consumed
by consumers get calculated in the inde). #nd it does not $actor in
ser!ices which have assumed so much importance in the economy.
Why India is not shifting to CPI ?
In India, there are four different types of &$I indices, and that makes
switching over to the Inde) from ($I fairly /risky and unwieldy./ ,he four
&$I series areC &$I Industrial (orkers@ &$I rban %on-Manual
Amployees@ &$I #gricultural labourers@ and &$I 4ural labour.
,he &$I cannot be used in India because there is too much of a lag in
reporting &$I numbers.
,he ($I is published on a weekly basis and the &$I, on a monthly basis.
#nd in India, inflation is calculated on a weekly basis.