Measurement of Inflation in India

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.  This gives rise to concepts of Headline inflation and core inflation whereby, the Headline inflation includes all the items and core inflation usually excludes food and fuel items. There is another variant of core inflation called mean inflation. In this, the components that show the most extreme monthly price changes are excluded.

Inflation Indices

In India, Consumer Price Index (CPI) and Wholesale Price Index (WPI) are two major indices for measuring inflation. In United States, CPI and PPI (Producer Price Index) are two major indices.

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 2004-05=100. Its worth note that the base year for CPI is 2012 currently. This is one reason for increasing difference between CPI and WPI in recent times.

Items

There are total 676 items in WPI and inflation is computed taking 5482 Price quotations. These items are divided into three broad categories viz. (1) Primary Articles (2) Fuel & power and (3) Manufactured Products, as shown in below table:

For your examinations, you may note down the below observations:

• The decreasing order of three groups of items in terms of weightage is manufactured products>primary articles >fuel & power
• Total weightage of food items and products {sum of the two} is around 30.
• Among manufactured products, the highest weightage is of chemicals and chemical products.

We note here that WPI does not take into consideration the retail prices or prices of the services.

Consumer Price Index

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

• CPI for Industrial Workers (IW)
• CPI for Agricultural Labourers (AL)/ Rural Labourers (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.

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:

Key differences between WPI & CPI

• Primary use of WPI is to have inflationary trend in the economy as a whole. However, CPI is used for adjusting income and expenditure streams for changes in the cost of living.
• WPI is based on wholesale prices for primary articles, administered prices for fuel items and ex-factory prices for manufactured products. On the other hand, CPI is based on retail prices, which include all distribution costs and taxes.
• Prices for WPI are collected on voluntary basis while price data for CPI are collected by investigators by visiting markets.
• CPI covers only consumer goods and consumer services while WPI covers all goods including intermediate goods transacted in the economy.
• WPI weights primarily based on national accounts and enterprise survey data and CPI weights are derived from consumer expenditure survey data.

GDP Deflator

The most comprehensive measure is GDP deflator which is measured as ratio of GDP (Gross Domestic Product) at current prices to GDP at constant prices. Since it encompasses the entire spectrum of economic activities including services, the scope and coverage of national income deflator is wider than any other measure. This data is released by the Central Statistical Organisation (CSO) but is not used as it comes quarterly and with a 2 month lag.