Producer Price Index (PPI): RBI proposes for PPI to measure inflation

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 economy’s 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 can’t be neglected
• The rates are mostly captured from mandis or places of wholesale business. Hence they don’t 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?

• 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.

Month: Current Affairs - July, 2012