PRICES

Macroeconomics Group Presentation

Covering the three types of Price

Indices

Presentation by:

Kanha Sharma (84)

Kashish Alvina (85)
Kawan Guneet Kaur (86)
Krishnakant Mukta (88)
 Overview

For the sixth consecutive

month in June, India's
consumer price index
(CPI)-based inflation rate
above the monetary policy
committee's (MPC) upper
tolerance limit of 6%.

Although it decreased
from 15.88% the previous
month to 15.18% in June,
the WPI inflation rate
remained high. Since May
2021, the WPI inflation
rate has stayed above
10%. This indicates that it
was unaffected by the high
base effect for the first
three months of the
current fiscal year.
 Introduction
Understanding prices
Price, the sum of money required to purchase a
specific good. Price is also a measure of value
insofar as it reflects what consumers are willing to
pay for a product's value.
The concept implies that prices serve an important
economic purpose. Prices offer an economic
mechanism by which products and services are
dispersed among the numerous people who desire
them, so long as they are not artificially controlled.
Price Indices
A scale known as a price index is used to measure
changes in price levels. The best tool for
measuring price level change is this one.
A price index is a measure of price changes using a
percentage scale. A price index can be based on
the prices of a single item or a selected group of
items, called a market basket.
WPI CPI GDP Deflator
Functions of price
Rationing function: Prices have the power to restrict access to limited resources. When a
resource is scarce, its price rises, making it only affordable to buyers who exhibit both
willingness and ability.
Signaling function: The amount of demand and supply for an offering, or its scarcity or
abundance in the market, frequently determines its price. If there is a great demand for
an offering but a short supply, its price will undoubtedly increase on the market.
Incentive function: Typically, when a commodity's price increases, it is due to a rise in
demand. This gives suppliers a window into the shifting consumer demand trends in an
industry. As a result, they would rather develop that specific offering because it has a
higher chance of being profitable.
Transmission function: Prices unavoidably provide information to all parties
participating in the market, allowing both producers and buyers to make well-informed
choices.
Consumer Price Index Wholesale Price Index GDP Deflator
(CPI) (WPI)
 Introduction WPI CPI GDP Deflator

Wholesale price index & its history ?
• The index to measure the changes in the average price level of
goods traded in wholesale market
• A total of 697 commodity products make up the index
• Available on a weekly basis for three different categories and a
monthly compilation with 2week average delay.
• It is published by the Economic Adviser in the Ministry of Commerce
and Industry
WPI & its current analysis
Wholesale price index (WPI) stayed in the double digits in 2022 Jan,
for the 10 months in a row. As input costs rise, businesses struggle
and more customers pay higher prices.
The high WPI rate was mainly on account of rising prices for crude
petroleum and natural gas, food items, basic metals and chemical
products.

WPI Ease on import limits,

Primary Articles Fuel and Power Manufactured Goods 16.6
Duty cuts on essentials,
22.62% 13.15% 64.23% 14.9 Use of buffer stock,
13.4 13.9
13.1 Crackdown on supply incase
• Commenced in 1942, index was calculated as the GM of 23 prices 10.7 of hoarding,
each with equal weights. - 21 - 21
v-
21
b-
22 - 22 l -2
2 Tight policies on Mineral
• Base year was revised from 2004-2005 to 2011-2012 to get more ay ug No Fe ay Ju
M A M Exports
reliable data.
Base Year of intro No. of items No of price
Increase in WPI pressurises the retail inflation, albeit with a lag.
week ended 19th 10th January, 1942 23 23
August, 1939 Analyzing RBI report we get that the cost-push pressures from high
1981-82 July, 1969 139 774 industrial raw material prices, transportation costs and global
2004-05 September, 2010 676 5482
logistics, and supply chain bottlenecks continue to impinge on core
2011-2012 2017 697 8331
inflation.
 Introduction WPI CPI GDP Deflator

What is CPI? Applications

The present Consumer Price Index (CPI) for Urban
Wage Earners and Clerical Workers, formerly called
the "Cost-of-Living Index," was initiated at the
time of World War I for use in wage negotiations.
The Consumer Price Index, or CPI as it is more
frequently known, is a measure of retail inflation in
the economy that gathers data on price changes for
most popular consumer products and services.
Every month at 5.30 p.m. on the 12th day, the Consumer Price Index—which is calculated
monthly—is announced. If it's a holiday, it's released on the next business day. The
Ministry of Statistics and Programme Implementation releases the All-India CPIs (Rural,
Urban, Combined) and the inflation rates for Sub-group, Group, CFPI, and General Index
(All-Groups) through a press release and posts the information online. First, items are
categorized, arranged, and coded based on Groups, Subgroups, and Categories. A
weighing diagram is then created. In a Consumer Spending Survey, a weighing diagram
shows the percentage of each item's overall consumption expenditure (CES). Prices are
gathered from 1181 village markets spanning all districts and 1114 urban markets
dispersed over 310 towns across the nation to calculate the Consumer Price Index (CPI).

Unlike WPI, CPI includes services as well and it

focuses on goods that are being purchased by
consumers using calendar year as a reference.
There are four types of CPI:
• CPI for Industrial Workers (IW).
• CPI for Agricultural Labourer (AL).
• CPI for Rural Labourer (RL).
• CPI (Rural/Urban/Combined).
 Introduction WPI CPI GDP Deflator

What is GDP Deflator?

• The GDP deflator, also known as the implicit price deflator, is a measure of inflation which demonstrates the extent to which increase in GDP has occurred due to higher
prices rather than increase in output.

• It is the ratio of the value of the goods and services an economy generates in a given year at the current prices to that of prices that were in effect in the base year.

• The GDP price deflator represents the factor by which nominal GDP is adjusted to calculate real GDP.

• The basket for GDP Deflator includes all goods that were produced domestically, weighted by the market value of the total consumption of each good.

• When compared to CPI and WPI, it is found to be a more exhaustive indicator of inflation as WPI only covers commodities whose prices are recorded at
the wholesale or producer level whereas CPI is based only on a basket of selected consumer goods.

• The GDP deflator automatically accounts for changes in consumption patterns or the introduction of new goods and services.

Key Trends in India’s GDP deflator over the last decade

• GDP Deflator in India averaged 106.01 points from 2005 until
2022.
• It increased from 146.10 points in 2021 to 160.10 points in 2022
reaching an all-time high.
• In the long-term, the India GDP Deflator is projected to trend
around 167.46 points in 2023 and 175.17 points in 2024.
THANK YOU
References:
https://www.drishtiias.com/daily-upda
tes/daily-news-analysis/wpi-and-cpi-in
flation-rates
https://www.investopedia.com/terms/
c/consumerpriceindex.asp
https://www.investopedia.com/terms/
w/wpi.asp
https://www.investopedia.com/terms/
g/gdppricedeflator.asp