Producer Price Index (PPI)

The Governor of RBI, D. Subbarao has mooted for a Producer Price Index (PPI) to measure
the average change over time in the sale prices of domestic goods and services. Currently, it
uses Consumer Price Index (CPI) and Wholesale Price Index (WPI) to aid in measuring
inflation.
But WPI does not capture price movements of services and is also a hybrid of consumer and
producer price quotes. CPI captures the prices of significant commodities at retail level but
not at producer level.
What is PPI?

Producer Price Index is the measure of the average change in selling prices received
by domestic producers for their output over a period of time.
The prices included in the PPI are from the first commercial transaction for many
products and some services.
It measures price changes from the perspective of the seller.

Advantages of having PPIs:

Will be globally comparable Will not include hidden costs like shipping, taxes and
other levies thus provides a much clear picture of inflation
Will give a view of the economys efficiency in transferring goods and services from
first level of transaction to other level.

Where do CPI and WPI fall short?

Loopholes in WPIs:

Incongruent with global standards as most of the nations either use CPI or PPI
Considers only goods and not services which is a huge part of our economy and cant
be neglected
The rates are mostly captured from mandis or places of wholesale business.
Hence they dont include prices at household consumer level.

Loopholes in CPIs:

Measures the change in the important commodities at the retail level but not at the
producer level.
The indices for rural labourers, agricultural labourers and industrial workers are
badly targeted to be used for macro policy making.
Started in January, 2011, it falls short of having sufficient history to aid data analysis
and to be used as a sole headline measure of inflation.

The prices determined at consumer level are affected by subsidies, sales and excise
taxes and distribution costs.

Which one is better b/w CPI and WPI?

Ques:

CPI is still considered a better option over WPI as it gauges changes in the general
price level of goods and services at the household level.

Consider the following statements regarding, Producer Price Index (PPI):

1.
2.
3.
4.

PPI measures price changes from the perspective of the seller.

PPI is a better indicator of price changes.
PPI does not consider services.
PPI takes into account taxes .

Which of the statements given above is / are correct?

(a) 1 and 2 only
(c) 2 and 4 only
Ans: A
Exp:

(b) 1, 2 and 3 only

(d) 1 , 2 , 3 and 4

Government has set up a panel under Professor B N Goldar to devise new Producer
Price Index to replace Wholesale Price Index.
The proposed index will seek to bring India's inflation gauge on a par with
international standards, with PPI tracking changes at the producer level for both
goods and services and CPI providing details of retail prices.
WPI includes taxes while PPI tracks inflation minus tax component.
While the present WPI does not considers services, PPI includes services.