MANAGERIAL ECONOMICS

Inflation

Topic 3 - Part I
ITM BUSINESS SCHOOL
ITM SKILLS UNIVERSITY
MBA 2024-2026 TERM 1
VIJAYANTA PAWASE
 Inflation
Inflation means ‘persistent’ and appreciable increase in
general level of prices over a period of time

Inflation is
Desirable
because

Keeping economic outlook optimistic and

helping production and employment

Promoting mobilization of resources by

inflationary method of financing
 Deflation and Disinflation
Deflation: a sustained fall in the price level

• Deflation is sometimes taken to mean a lower level of economic

activity, which might be the result of government policy. Indeed,
deflationary policy measures are those designed to reduce
aggregate demand. However, deflation is now more commonly
taken to refer specifically to a sustained fall in the price level. It
results in a rise in the value of money, with each currency unit
having greater purchasing power. Deflation involves a negative
inflation rate, for example, –3%.

Disinflation: a fall in the inflation rate

• In contrast, disinflation occurs when the inflation rate falls but is

still positive. For instance, the inflation rate may decline from 8%
to 6%. In this case, the price level is still rising but at a slower rate.
 Stagflation
Stagflation: is a situation in an economy when inflation and
unemployment both are at higher levels, contrary to conventional belief.

▪ Such a situation first arose in the 1970s in the US economy (average

unemployment rate above 6 per cent and the average rate of inflation
above 7 per cent)34 and in many Euro-American economies. This took
place as a result of oil price increases of 1973 and 1979 and
anticipation of higher inflation. The stagflationary situation continued
till the early 1980s. Conventional thinking that a trade-off existed
between inflation and unemployment (i.e., Phillips Curve) was
falsified and several economies switched over to alternative ways of
economic policies, such as monetaristic and supply-side economics.
▪ When the economy is passing through the cycle of stagnation (i.e.,
long period of low aggregate demand in relation to its productive
capacity) and the government shuffles with the economic policy, a
sudden and temporary price rise is seen in some of the goods—such
inflation is also known as stagflation. Stagflation is basically a
combination of high inflation and high growth.
 Reflation
Reflation is a situation often deliberately brought by the
government to reduce unemployment and increase demand
by going for higher levels of economic growth.

▪ Governments go for higher public expenditures, tax cuts,

interest rate cuts, etc. Fiscal deficit rises, extra money is
generally printed at higher level of growth, wages increase
and there is almost no improvement in unemployment.
▪ Reflation can also be understood from a different angle—
when the economy is crossing through the cycle of
recession (low inflation, high unemployment, low
demand, etc.) and government takes some economic
policy decisions to revive the economy from recession,
certain goods see sudden and temporary increase in their
prices, such price rise is also known as reflation.
 Methods of Measuring Inflation

GENERAL PRICE
LEVEL
MEASUREMENT There are three different measures of
general price level. These are:
▪ Consumer Price Index (CPI),
▪ Wholesale Price Index (WPI), and
▪ GDP Deflator.
oEach is a weighted average of several prices
and is presented in the form of index
numbers.
 Methods of Measuring Inflation

CPI
▪ CPI signals changes in prices facing
the consumer.

WPI
▪ WPI signals changes in prices facing
the producer.

GDP ▪ GDP deflator signals overall national

Deflator price changes.

Each in its own way provides a measure of inflation in the economy.

None is a perfect measure.
 Methods of Measuring Inflation
Change in Price
Index Numbers
(PIN) (CPI or
WPI)

Change In GDP
Deflator

PINt is the Wholesale Price Index(WPI)

for the year selected t=2023.
PINt-1 is the Wholesale Price Index(WPI)
for the year selected t-1=2022
 Methods of Measuring Inflation
Base year Base year Base year Current Price
Item
(2012) (2012) (2012) year relatives,
(1) quantity prices weights (2023) (Col.
prices 5/Col. 3
(2) (3) (4) x 100)
(5)
(6)
Rice 15 kg Rs. 10/kg Rs.15/kg
Wheat 10 kg Rs. 8/kg Rs.10/kg
Milk 40 L Rs. 5/L Rs.7/L
Cloth 10 m Rs.8/m Rs.10/m
House Two room Rs. 200 Rs. 400
 Methods of Measuring Inflation
Base year Base year Base year Current Price
Item
(2012) (2012) (2012) year relatives,
(1) quantity prices weights (2023) (Col.
prices 5/Col. 3
(2) (3) (4) x 100)
(5)
(6)
Rice 15 kg Rs. 10/kg 0.16 Rs.15/kg 150
Wheat 10 kg Rs. 8/kg 0.09 Rs.10/kg 125
Milk 40L Rs. 5/L 0.22 Rs.7/L 190
Cloth 10 m Rs.8/m 0.09 Rs.10/m 125
House Two room Rs. 200 0.44 Rs. 400 200
 Methods of Measuring Inflation
Base year Base year Base year Current Price
Item
(2012) (2012) (2012) year relatives,
(1) quantity prices weights (2023) (Col.
prices 5/Col. 3
(2) (3) (4) x 100)
(5)
(6)
Rice 15 kg Rs. 10/kg 0.16 Rs.15/kg 150
Wheat 10 kg Rs. 8/kg 0.09 Rs.10/kg 125
Milk 40L Rs. 5/L 0.22 Rs.7/L 140
Cloth 10 m Rs.8/m 0.09 Rs.10/m 125
House Two room Rs. 200 0.44 Rs. 400 200

CPI/WPI = (150 x 0.16) + (125 x 0.09) + (140 x 0.22)

+ (125 x 0.09) + (200 x 0.44) = 165.3
 Methods of Measuring Inflation
The steps
involved in
1. Find the typical consumption basket in the base
the year (column 1). This will include both goods and
construction services. In the table we have considered only 5
of CPI can items for illustration; in reality there are many
be more.
explained
with the
help of the 2. For each item in the consumption basket, find
above table the base year quantity consumed (column 2) and
as follows: base year retail prices (column 3). Data on items
in the basket, quantity consumed of each item
and its price can be obtained from the
comprehensive consumption surveys conducted
by the Central Statistical Organization and
reported approximately every five years.
 Methods of Measuring Inflation
The steps
involved in 3. Find out the weight of each item in the
the consumption basket in the base year
construction (column 4). First, find out the total
of CPI can
be expenditure on the basket (Rs. 910) by
explained multiplying the quantity of each item
with the (column 2) by its price (column 3) and then
help of the summing it up. Then see the share (weight)
above table
as follows:
of each item's expenditure in the total
expenditure. Thus, the weight of rice in the
consumption basket, obtained as Rs. 150/Rs.
910, is 0.16, and similarly, for other items.
The sum of the weights must add to 1.
 Methods of Measuring Inflation
The steps 4. Assume the base year weights hold in the current
involved in year also. This is a crucial assumption in the
the construction of the CPI. What it means is that the
construction consumption basket and the proportionate share of
of CPI can each item in the basket do not change from the base
be year to the current year. Once we assume that all we
explained need to do, for each item, is to divide the current year
with the prices (column 5) with the base year prices (column 3)
help of the and multiply by 100 and obtain column 6. The ratio of
above table prices is called the price relative.
as follows:
5. Column 6 tells us the increase in price of each item
in the consumption basket between the base year and
the current year. For example, an index of 150 in case
of rice tells us that between 2012 and 2021/22, the
price of rice has gone up by 50%, and so on for other
items.
 Methods of Measuring Inflation
The steps We, however, need a composite index to know what
involved in the increase in the cost of the basket is in 2021/22,
the compared to 2012. Since quantity weights (column 4)
construction are constant, we multiply each item's index in the
of CPI can current period (column 6) by its weight (column 4) and
be add those up to obtain a weighted average for the
explained entire basket. This gives us an index of 165.3.12
with the
help of the
above table
as follows:
What this means is that, between the base year and
current year, the cost of the entire basket has gone
up by 65.3%.
 India - Consumer Price Index (CPI) 2023
•Consumer Price Index CPI in India increased to 180.90 points in June from
179.10 points in May of 2023. source: Ministry of Statistics and Programme Implementation (MOSPI)
India - Consumer Price Index (CPI) 2023
 India - Consumer Price Index (CPI) 2023
▪ India's annual consumer inflation rate accelerated for the
first time in five months to 4.81% in June of 2023 from an
upwardly revised 4.31% in May, and above market forecasts
of 4.58%.
▪ Food inflation increased to 4.99%, from 2.91% in May with
the biggest gains reported for (19.19%), cereals (12.7%),
pulses (10.5%), and milk (8.6%).
▪ Also, the cost of vegetables declined by only 0.9%, much
less than a nearly 8% fall in May, led by a rise in prices of
tomatoes and onions.
▪ Meanwhile, prices of fuel and light went up 3.9%, housing
cost rose 4.6%, miscellaneous increased 5.2% and prices
for clothing and footwear surged 6.2%.
▪ The Reserve Bank of India targets inflation at 2-6% but aims
to bring it to the mid-point of 4%.
▪ source: Ministry of Statistics and Programme Implementation (MOSPI)
1 - Method of Measuring Inflation: WPI
 1 - Method of Measuring Inflation: WPI

▪ Item basket consist of 697 items (against

676 in existing base) with following changes.
▪ Deletion and addition of items is based on
their relative importance in the commodity
basket.
1 - Method of Measuring Inflation: WPI

WPI

22.62%

Primary Articles

Fuel & Power

Manufactured Products
13.15%
64.23%
 1 - Method of Measuring Inflation: WPI 2023
Producer Prices in India decreased to 149 points in June from 149.60 points in
May of 2023. source: Office of the Economic Advisor, India
1 - Method of Measuring Inflation: WPI 2023
 1 - Method of Measuring Inflation: WPI 2022

▪ India's wholesale prices fell by 4.12 percent year-on-year

in June 2023, compared with market estimates of a 3.6
percent drop, following a 3.48 percent decline in the prior
month.
▪ It was the third period of deflation and the steepest since
October 2015 due to a downturn pressure from all
sectors.
▪ The cost of fuel & power (-12.63% vs -9.17% in May) and
primary articles (-2.87% vs -1.79%) shrank faster.
Meanwhile, prices dropped less for food (-1.24% vs -
1.59%) and manufacturing (-2.71% vs -2.97%), mainly for
basic metals (-5.53% vs -9.17%) and rubber and food
products (-5.98% vs -6.85%).
▪ On a monthly basis, wholesale prices were down 0.40%
in June, the third straight month of decrease, after a
marginally revised 0.99% fall in May. source: Office of the Economic Advisor,
India
1 - Method of Measuring Inflation: WPI 2022
1 - Method of Measuring Inflation: WPI
2 - Methods of Measuring Inflation :
Consumer Price Indices (CPI)
2 - Methods of Measuring Inflation : Consumer Price Indices (CPI)
 2 - Methods of
Measuring Inflation :
Consumer Price Indices
(CPI)
Weighting Diagram for
CPI (Base Year : 2012)
2 - Methods of Measuring Inflation : Consumer Price Indices (CPI)
 7 Kinds of Inflation
WHOLESALE INFLATION RETAIL INFLATION
▪Wholesale inflation is measured on Retail inflation or headline
the basis of the changes in inflation is calculated on the
wholesale price index (WPI). Since it basis of changes in the
is based on the wholesale prices, it Consumer Price Index (CPI).
helps the government to spot the Since it measures the impact of
price rise in advance.
price rise, it is more relevant for
▪However, wholesale inflation lost
its relevance after the government
financial planning for the
decided to change the frequency of average investor.
reviewing the index from a weekly While people from big cities
to monthly basis, and the Reserve should use the urban variant,
Bank of India shifted its monetary those from villages and smaller
focus from wholesale to retail cities can use the rural one.
inflation.
 7 Kinds of Inflation

FOOD INFLATION HOUSING INFLATION

▪Food inflation is a subset of ▪Housing inflation is another
headline inflation and is subset of headline inflation. It is
expected to rise further in the rising at a faster clip compared
coming months due to a deficit in with the headline inflation and
the monsoon rains. was above 15% two years ago.
▪Given the large number of ▪The cost of housing is a major
people below the poverty line, it expenditure for city dwellers and
is a major cause for concern for is more important for them. This
developing countries like India. It is why one must consider it
is essential for investors to take while planning for the real estate
this inflation into account while goals.
planning their finances.
 7 Kinds of Inflation
LIFESTYLE INFLATION
▪As an individual's income increases, there is a gradual improvement in lifestyle—
bigger house, branded clothes, better car. These additional expenses result in
what is termed as lifestyle inflation.
▪So the expenses increase not just on account of the rise in prices, but also due to
a better lifestyle. Since the rise depends on the individual, it is not possible to put
a number that is applicable to all.
▪However, one must consider it while computing long-term goals, such as
retirement planning or children's wedding.

EDUCATION INFLATION
▪Though education inflation is also a subset of headline inflation, it only
measures the increase in cost of education and stationery.
▪It is essential to provide for this inflation while planning for your child's
studies because most of the higher education is now subsidized and the
subsidy might not be available by the time your ward reaches adulthood.
 7 Types of Inflation

MEDICAL INFLATION
▪Medical inflation is relatively under control in India due to the
government restrictions on drug price rise and technological
innovation to keep a tab on medical equipment costs.

▪However, medical expenses are bound to rise as you grow older

and you need to consider a higher rate of inflation so
that you face any problem during your sunset years.
CPI Indexes
CPI Indexes
CPI Indexes
3 - Methods of Measuring Inflation: GDP Deflator
3 - Methods of Measuring Inflation: GDP Deflator
GDP deflator is nominal GDP divided by real GDP.

In the estimation of GDP deflator quantity weights

GDP Deflator

are not fixed. They vary each year. We come to

know of the quantity of goods and services
produced each year only at the end of the year.

GDP deflator, therefore, comes with a one-year

time lag.
Otherwise, it is perhaps the most comprehensive
measure of changes in the general price level as it
considers all domestically produced final goods
and services.
3 - Methods of Measuring Inflation: GDP Deflator

• Inflation Rate = (Current Year’s GDP Deflator –

Previous Year’s GDP Deflator) / Previous Year’s
GDP Deflator X 100

According to the Economists, Rate of Inflation

measured on GDP Deflator is more realistic than
on CPI or WPI.But in India we use CPI for
calculating Inflation rate.
3 - Methods of Measuring Inflation: GDP Deflator

GDP Deflator in India increased to 173.30 points in 2023

from 160.10 points in 2022.
source: Ministry of Statistics and Programme Implementation (MOSPI)
3 - Methods of Measuring Inflation: GDP Deflator

GDP Deflator in India increased to 146.10 points in 2021 from

138.80 points in 2020. source: Ministry of Statistics and Programme Implementation (MOSPI)
 Comparison of 3 Methods Measuring Inflation

The CPI time lag is 1 month. Besides, considering the rapidity with
which consumption habits are changing, using a fixed quantity weight
for an extended period of time may be questionable. Also, them is no
composite CPI covering the whole of India.

WPI suffers from a major flaw in that it does not consider services.
With service sector accounting for more than half of India's GDP, this
omission is serious. The inclusion of intermediate goods also leads to
cascading effect on prices.

WPI scores over both CPI and GDP deflator as it is available with the
least time lag of two weeks. GDP deflator is the broadest indicator of
changes in the domestic price level. But it is an implicit measure and
comes with a longer lag. Also, the data is subject to frequent revisions
with revision in GDP figures.
 Comparison of 3 Methods Measuring Inflation

Price indices: A comparison

Price Index Basis Prices Basket Weights Lag
(1) (2) (3) (4) (5) (6)
Consumption Fixed
Consumer goods and ser- quantity One
Retail
Price Index vices; Includes weights month
imports
Larger basket
Wholesale of goods, Fixed One
Whole-
Price index including inter- quantity month
sale
mediate goods. weights
But no services
, All domestically Quantity
GDP Deflator produced weights one year
Retail
final goods and not fixed
services
 Difference between CPI and Core CPI
▪The personal consumption expenditure (PCE) measure is the
component statistic for consumption in GDP. It consists of the actual and
imputed expenditures of households and includes data pertaining to
durable and non-durable goods and services. It is essentially a measure of
goods and services targeted towards individuals and consumed by
individuals.
▪The difference between CPI and PCE seemed relatively insignificant.
However, a big issue is the difference between CPI and Core CPI.

▪CPI is the consumer price index. A measure of the cost of living for the
typical person.

Core CPI is the CPI – energy and food prices.

▪Energy and food prices are removed because they have tendency to be
highly volatile.
 Difference between CPI and Core CPI
Policy Implications of Core CPI
▪This clearly has policy implications. If we look only at CPI, monetary authorities
may be inclined to change interest rates more frequently. For example, in 2008,
we had a rise in energy prices causing cost push inflation of 5%, a few months
later we were in deep recession.
▪ In other words CPI can give a misleading impression of underlying inflationary
pressures. If you tighten monetary policy because of temporary food and energy
inflation, you create potential for slowing down economy. Similarly when there is
a slump in energy and food prices, there is a danger monetary policy can become
too lax, creating future underlying inflation.
▪It is true that consumers have to face rising food prices and rising energy prices.
Linking pensions to Core CPI. This could give pensioners an increase in benefits
less than there cost of living.
▪However, it is important for the RBI and monetary authorities. It explains why
the RBI haven’t been increasing interest rates in response to inflation above
target.
▪There is a danger temporary cost push inflation could lead to higher inflation
expectations. But, this is not convincing.
Discussion/Extra Reading
( Not for examination)
1 - Method of Measuring Inflation: WPI
▪ Measure of average change in wholesale price.
▪ First published from the week commencing 10th
January 1942 (Base year 1939).
▪ WPI has been revised with base years 1952-53, 1961-
62, 1970-71, 1981-82, 1993-94, 2004-05.
▪ Current series of WPI (Base 2004-05) was launched
on September 2010.
▪ Seventh revision is with base year 2011-12
synchronized with base year of other important
indicators such as GDP, IIP etc
▪ New series based on the recommendation of the
Working Group chaired by Late Dr. Saumitra
Chaudhari.
1 - Method of Measuring Inflation: WPI
Definition of Wholesale price
• Price for bulk sale at the first stage of transaction
• Existing formula (WPI Base 2004-05) = Basic Price (ex factory price,
ex mine price or mandi price) + Excise Duty- Trade discount
• New Formula (WPI Base 2011-12)= Basic price -Trade
Discount
• New WPI is not influenced by fiscal policy

Weighting Structure
• Shows relative importance of an item in a basket based on its
availability in the Indian economy as reflected by Net traded
value
• Net traded value = Gross Value of Output + Import – Export

Methodology
• Compilation of item level indices based on Geometric Mean
 1 - Method of Measuring Inflation: WPI

▪ Item basket consist of 697 items (against

676 in existing base) with following changes.
▪ Deletion and addition of items is based on
their relative importance in the commodity
basket.
1 - Method of Measuring Inflation: WPI

WPI

22.62%

Primary Articles

Fuel & Power

Manufactured Products
13.15%
64.23%
 Primary Articles
A. Food Articles
• Prices of seasonal fruits and vegetables now available for longer
period
• 7 new fruits and 9 new vegetables added
• New fruits added include Mosambi (Sweet Orange), Pomengranate,
Amla, Jackfruit, Pear Almond, and Walnut.
• New vegetables added include Radish, Carrot, Cucumber, Pointed
gourd, Bitter gourd, Bottle gourd, Beans, Pumpkin and Drumstick.

B. Minerals
• New minerals added : Copper Concentrate, Lead Concentrate, and
Garnet
• Minerals removed : Copper Ore, Graphite, Fireclay, Magnesite ,
Gypsum, Kaolin, Dolomite, Barytes and Steatite

C. Crude Petroleum and Natural Gas

• Natural Gas added because of its increasing importance
 Fuel & Power
Coal
• Trifurcation of Non coking coal (Based on Gross Calorific Value)
• Non-Coking Coal G1 to G6 [GCV exceeding 5500 Kcal/kg.]
• Non-Coking Coal G7 to G14 [GCV 3100 Kcal/kg. to 5500 Kcal/kg.]
• Non-Coking Coal G15 to G17 [GCV < 3100 Kcal/kg.]
• Coke deleted from sub group ‘Coal’ of Fuel and Power because of its
decreasing importance

B. Mineral Oils
• Petroleum coke introduced because of its increasing importance
• Light Diesel Oil (LDO) dropped because of its decreasing importance

Electricity
• 1 item group for Electricity sector
• Monthly average rate of sale of power of 49 generating stations from
Central, state and private sector covering Hydro and Thermal is used
• To reflect the price change at bulk transaction level
 Manufactured Products
New series (2011-12), 22 two digit groups based on NIC classification (2008)
Selection of items from the Annual Survey of Industries (ASI) data by covering at least 80 percent
of the output of each 2 digit group.
1 - Method of Measuring Inflation: WPI
WPI Food Index

• A new WPI Food index to be compiled on a monthly basis to estimate the WPI
based inflation in food items
• This index is estimated by taking the aggregate of WPI for Food Products (9.12)
and Food Articles (15.26)
• The total weight of WPI Food Index will be 24.38
• Effective monitoring of food inflation at wholesale level

High Level Technical Review Committee has been set up

• Committee to review periodically the list of products in the item basket of

WPI to keep pace with the dynamic changes in the economy
• Committee to suggest methodology for inclusion of new and important
items in and exclusion of outdated items from the existing basket as and when
warranted.
• Committee is to be headed by Secretary, DIPP. Other Members of the
Committee are Secretary MoSPI, Chief Economic Adviser, MoF and Principal
Adviser DIPP.
 Data Source
Directorate of Economics and Coal India Ltd, Ministry of (No. of factories

Manufactured Products
Fuel & Power
Primary Articles
Statistics, and National Coal
Horticulture Board, M/o increased from 3744
Agriculture and Farmers Bharat Petroleum Corporation to 5788)
Ltd
Welfare
Hindustan Petroleum Different Private and Public
Tea Board & Coffee Board, Corporation Ltd sector units producing
Department of Commerce respective goods taken from
Indian Oil Corporation Ltd the Annual Survey of
Directorate of Sugar and
Vanaspati, Department of Mangalore Refinery and Industries frame.
Food, Ministry of Consumer Petrochemical Ltd. Directorate of Economics and
Affairs Central Electricity Authority Statistics (DES), Ministry of
East India Cotton Association, Agriculture & Farmers Welfare
Mumbai Textiles Commissioner
Textile Commissioner, Joint Plant Committee,
Mumbai Ministry of Steel
Central Silk Board, Bengaluru
National Dairy Development
Board,
Rubber Board, Kottayam
Indian Bureau of Mines,
Nagpur
Ministry of Petroleum &
Natural Gas
Gas Authority of India Ltd
Annual Growth Rates (%)- WPI Major Groups Base 2011-12 vis-à-vis 2004-05
1 - Method of Measuring Inflation: WPI
Procedure for Estimation for Non- response and Data Substitution
II. Substitution and replacement: First of all it should be ensured that the
prices of both the price quotations, outgoing quotation (old price) and
incoming quotation (new price) are collected concurrently for some
time and respective price movements observed for any extreme
variation. Splicing is done by working out a ratio (linking coefficient) of
concurrent price quotations and multiplied by the base price as below:
III.Price relatives are worked out by dividing the current price with the
updated base price. Splicing can be done other way round, wherein,
linking coefficient can be worked out by dividing old price (outgoing
quote) with the new price (incoming quote) and multiplied by the
current price.
IV.In WPI the substitution is effected from the date final indices are
compiled. The effective date and the splicing ratio are documented
properly.
1 - Method of Measuring Inflation: WPI
Linking Factor
• In order to maintain continuity in the time series data on wholesale
price index, it is vital to provide a linking factor so that the new series,
when released, may be compared with the outgoing one.
• The Office of the Economic Adviser have been using the arithmetic
conversion method to link the various prices index series. The linking
factor for the three broad groups of commodities WPI are as follows.
However, the detailed individual commodities indices and their
weights are available from 2004-05 onwards.
Methodology of Index Calculation
1 - Method of Measuring Inflation: WPI
Scrutiny of Data
1st stage, once the price data are scrutinized, price relative for each price
quote is calculated. Price relative is calculated as the ratio of the
current price to the base price multiplied by 100 i.e. (P1/Po)X100.
2nd stage, commodity/item level index is arrived at as the simple
arithmetic average of the price relatives of all the varieties (each
quote) included under that commodity. Since quantities produced at
unit level are not equal the average of price relatives method is
preferred to arrive at item level index in WPI.
3rd stage, the indices for the sub groups/groups/ major groups are
compiled and the aggregation method is based on Laspeyres formula
as below:
I= ∑ (Ii x Wi) / ∑ Wi
Where,
I = Index numbers of wholesale prices of a sub- group/group/ major
group/ all commodities
Ii = Index of the ith item / sub- group/ group/ major group.
Wi = Weight assigned to the ith item of sub- group/group/ major group.
Producer Prices in India decreased to 121.20 Index Points in July from 121.50 Index Points in June of
2019. Producer Prices in India averaged 95.40 Index Points from 2004 until 2019, reaching an all time high
of 122 Index Points in October of 2018 and a record low of 62.44 Index Points in April of 2004.

In India, the Producer Price Index measures the average change in price of goods and services sold by
manufacturers and producers in the wholesale market during a given period.
Wholesale prices in India rose by 1.08 percent year-on-year in July 2019, slowing from a 2.02 percent gain
in the previous month and missing market expectations of 1.93 percent. It was the lowest wholesale rate
since June 2017, mainly due to a slowdown in manufacturing inflation and a decline in fuel prices. Producer
Prices Change in India averaged 7.01 percent from 1969 until 2019, reaching an all time high of 34.68
percent in September of 1974 and a record low of -11.31 percent in May of 1976.
Wholesale prices in India rose by 1.08 percent year-on-year in July 2019, slowing from
a 2.02 percent gain in the previous month and missing market expectations of 1.93
percent. It was the lowest wholesale inflation rate since June 2017.

Manufacturing inflation, which contributes around 64 percent to the wholesale price index,
slowed to 0.34 percent in July from 0.94 percent in June, as prices increased at a softer rate
for chemical & chemical products (0.42 percent vs 1.45 percent), textiles (1.36 percent vs
2.67 percent), and wood and products of wood and cork (1.36 percent vs 1.43 percent). In
addition, prices fell for both rubber and plastics (-0.27 percent vs 0.18 percent) and basic
metals (-4.28 percent vs -3.72 percent).

Prices of primary articles advanced 5.03 percent, compared to 6.72 percent a month earlier,
as cost of food articles rose less (6.15 percent vs 6.98 percent in June), in particular
vegetables (10.67 percent vs 24.76 percent), pulses (20.08 percent vs 23.06 percent) and
milk (0.28 percent vs 0.91 percent). On the other hand, there were declines in sugar cost (-
0.94 percent vs 4.01 percent) and potato prices (-23.63 percent vs -24.27 percent).

Meanwhile, wholesale prices of fuel products, including petrol, diesel and cooking gas, fell
further (-3.64 percent vs -2.20 percent).

On a monthly basis, wholesale prices fell by 0.2 percent in July, following a 0.2 percent gain
in June.
 Inflation rate (%)

10.0

0.0

-8.0
-6.0
-4.0
-2.0
2.0
4.0
6.0
8.0
Apr 12
Jun 12
Aug 12
Oct 12
Dec 12
Feb 13
Apr 13
Jun 13
Aug 13
Oct 13
Dec 13
Feb 14

Inflation (2011-12)
Apr 14
Jun 14
Aug 14
Oct 14
Dec 14
Feb 15
Apr 15
Jun 15
Aug 15
Oct 15
Dec 15
Feb 16
Inflation (2004-05)

Apr 16
Jun 16
Aug 16
Comparison of Inflation Rates (%)- All Commodities
Inflation Rate Calculated by WPI

Oct 16
Dec 16
Feb 17
Mar 17
 Inflation rate (%)

-10.0
0.0
5.0
10.0
15.0
20.0

-5.0
Apr 12
Jun 12
Aug 12
Oct 12
Dec 12
Feb 13
Apr 13
Jun 13
Aug 13
Oct 13
Dec 13
Feb 14
Apr 14

Inflation (2011-12)
Jun 14
Aug 14
Oct 14
Dec 14
Feb 15
Apr 15
Jun 15
Aug 15
Oct 15
Dec 15
Feb 16
Apr 16
Comparison of Inflation Rates (%)-Primary Articles

Jun 16
Aug 16
Inflation (2004-05)
Inflation Rate Calculated by WPI

Oct 16
Dec 16
Feb 17
Mar 17
 Inflation rate (%)

-30.0
-20.0
-10.0
0.0
20.0

10.0
30.0
Apr 12
Jun 12
Aug 12
Oct 12
Dec 12
Feb 13
Apr 13
Jun 13
Aug 13
Oct 13
Dec 13
Feb 14

Inflation (2011-12)
Apr 14
Jun 14
Aug 14
Oct 14
Dec 14
Feb 15
Apr 15
Jun 15
Aug 15
Oct 15
Dec 15
Inflation (2004-05)

Feb 16
Comparison of Inflation Rates (%)- Fuel & Power

Apr 16
Jun 16
Inflation Rate Calculated by WPI

Aug 16
Oct 16
Dec 16
Feb 17
Mar 17
 Inflation rate (%)

2.0
4.0
6.0
8.0

0.0

-4.0
-2.0
Apr 12
Jun 12
Aug 12
Oct 12
Dec 12
Feb 13
Apr 13
Jun 13
Aug 13
Oct 13
Dec 13
Feb 14
Apr 14

Inflation (2011-12)
Jun 14
Aug 14
Oct 14
Dec 14
Feb 15
Apr 15
Jun 15
Aug 15
Oct 15
Dec 15
Feb 16
Apr 16
Jun 16
Aug 16
Inflation Rate Calculated by WPI

Inflation (2004-05)
Comparison of Inflation Rates (%)- Manufactured Products

Oct 16
Dec 16
Feb 17
Mar 17
 Inflation rate (%)

0.0
2.0
4.0
6.0
10.0

8.0
12.0
14.0
16.0

-4.0
-2.0
Apr 12
Jun 12
Aug 12
Oct 12
Dec 12
Feb 13
Apr 13
Jun 13
Aug 13
Oct 13
Dec 13
Feb 14
Apr 14

Inflation (2011-12)
Jun 14
Aug 14
Oct 14
Dec 14
Feb 15
Apr 15
Jun 15
Aug 15
Oct 15
Dec 15
Feb 16
Apr 16
Jun 16
Inflation (2004-05)

Aug 16
Inflation Rate Calculated by WPI

Oct 16
Dec 16
Feb 17
Comparison of Food Inflation (%)- (Food Articles and Food Products)
 Inflation
Rate
Calculated
by WPI
 Inflation
Rate
Calculated
by WPI
 India July Wholesale Inflation Slows to 5.09%

•Wholesale prices in India rose by 5.09 percent year-on-year in July of 2018, after a 5.77 percent gain
in the prior month. Figure came in below market estimates of 5.24 percent, as prices of of food fell
sharply while cost of manufactured products and fuel went up faster.

•In July, cost of primary articles increased much slower (1.7.3 percent from 5.3 percent in June), as cost
of food declined (-2.16 percent from 1.8 percent in a month earlier), namely potato (-42.45 percent);
onion (-9.5 percent)l and fruits (2.71 percent). Meantime, cost rose at a higher rate for manufactured
products (4.26 percent from 417 percent), and fuel and power (18.10 from 16.18 percent).

•On a monthly basis, wholesale prices increased by 0.4 percent, compared to a 1.1 percent rise in June.
Inflation Rate Calculated by WPI
Inflation Rate Calculated by WPI
 India WPI Rises More than Expected in July

▪ Wholesale prices in India rose 1.88 percent year-on-year in July of

2017, compared to a 0.9 percent rise in the prior month while
market estimated a 1.3 percent rise.
▪ A surge in food prices offset a slowdown in cost of manufactured
products and fuel.
▪ In July, cost of primary articles increased by 0.46 percent (from -
3.86 percent in June), mainly due to a 2.15 percent rise in cost of
food (from -3.48 percent in a month earlier), namely vegetables
(21.95 percent compared to -21.16 percent). Meantime, cost went
up less for: manufactured products (2.18 percent from 2.27
percent) and fuel and power (4.37 percent from 5.28 percent).
▪ On a monthly basis, wholesale prices increased by 1.1 percent,
after declining 0.1 percent in a month earlier.
▪ In May 2017, the government revised the base year to 2011-12
from 2004-05, aiming to align it with the base year of other
indicators like the GDP and the industrial production index.
Inflation Rate Calculated by WPI
Inflation Rate Calculated by WPI
Inflation Rate Calculated by WPI
 India WPI Rises the Least in 4 Months
▪ Indian wholesale prices rose 3.39 percent year-on-year in October of 2016,
following a 3.57 percent gain in September while markets expected a 3.75 percent
rise. It was the seventh straight month of increase but the lowest figure since June,
as a slowdown in prices of food offset a faster rise in cost of manufactured products
and petrol.
▪ In October, food prices went up 4.34 percent from a year earlier, following a 5.75
percent rise in the preceding month. Among food prices, potatoes recorded the
highest rise (+60.58 percent), followed by pulses (+21.80 percent), fruits (+6.45
percent), wheat (+6.30 percent); egg, meat & fish (6.20 percent), cereals (+6.13
percent), rice (+4.57 percent) and milk (+4.19 percent). In contrast, prices declined
for: onion (-65.97 percent) and vegetables (-9.97 percent).
▪ Cost of manufactured products increased by 2.67 percent, compared to a 2.48
percent rise in the previous month.
▪ Petrol prices went up 3.57 percent year-on-year, following a 1.25 percent gain in
September. Cost of diesel also increased by 19.32 percent, as compared to a 19.08
percent rise in a month earlier.
▪ On a monthly basis, wholesale prices increased 0.1 percent, following a 0.2 percent
drop in a month earlier.
2 - Methods of Measuring Inflation :
Consumer Price Indices (CPI)
 2 - Methods of Measuring Inflation : Consumer Price Indices (CPI)

CPI
▪ A Consumer Price Index (CPI) is designed to measure the changes over time in
general level of retail prices of selected goods and services that households
purchase for the purpose of consumption. Such changes affect the real
purchasing power of consumers’ income and their welfare.
▪ The CPI measures price changes by comparing, through time, the cost of a fixed
basket of commodities. The basket is based on the expenditures of a target
population in a certain reference period. Since the basket contains commodities
of unchanging or equivalent quantity and quality, the index reflects only pure
price.
▪ Traditionally, CPI numbers were originally introduced to provide a measure of
changes in the living costs of workers, so that their wages could be
compensated to the changing level of prices.
▪ However, over the years, CPIs have been widely used as a macroeconomic
indicator of inflation, and also as a tool by Government and Central Bank for
targeting inflation and monitoring price stability.
▪ CPI is also used as deflators in the National Accounts. Therefore, CPI is
considered as one of the most important economic indicators.
2 - Methods of Measuring Inflation : Consumer Price Indices (CPI)

Weighing Diagram
▪ Weighing diagram gives the share of each item in the
total consumption expenditure in a CES.
▪ The weighing diagrams for the CPI series (Base
2012=100) have been derived on the basis of average
monthly consumer expenditure of an urban/rural
household obtained from MMRP data of NSS 68th
round Consumer Expenditure Survey (2011-12).
▪ Only consumption expenditure has been considered for
the purpose of preparation of weighing diagrams. Non-
consumption expenditures, like legal expenses etc. have
been excluded.
2 - Methods of Measuring Inflation : Consumer Price Indices (CPI)
 2 - Methods of
Measuring Inflation :
Consumer Price Indices
(CPI)
Weighting Diagram for
CPI (Base Year : 2012)
2 - Methods of Measuring Inflation : Consumer Price Indices (CPI)
2 - Methods of Measuring Inflation : Consumer Price Indices (CPI)

Following Four-fold Criteria have Been Adopted or this Purpose

I. include all PDS items(Public Distribution System (PDS) prices, also known as
Fair Price Shop prices, are collected in respect of four items viz. Rice–PDS,
Wheat/Wheat-atta–PDS, Sugar-PDS and Kerosene-PDS. These are collected in
respect of three groups of beneficiary households viz. Above Poverty Line
(APL), Below Poverty Line (BPL) and Antyodaya Anna Yojana(AAY) households.)
II.include all items accounting for 1% or more of total expenditure at subgroup
level.
III.include all items accounting for more than specified percentage of total
expenditure of all consumption items:
IV.include all items for which more than 75% households have reported
consumption. Items satisfying any of the above four conditions were retained.
2 - Methods of Measuring Inflation : Consumer Price Indices (CPI)

Selection of Towns and Villages for Price Collection

• Prices are collected from 1181 village markets covering all districts and 1114
urban markets distributed over 310 towns of the country. These villages and
towns have been selected from all States/UTs adopting the following sampling
procedure:-
RURAL
All the districts of the country have been considered for collection of rural price.
(i) Within each State/UT, top fifty villages (if villages in a district are more than 50,
all villages if it is less than 50) have been arranged in the descending order on the
basis of Census 2001 population for each district.
(ii) Fifty villages selected above have been divided into two sets i.e. Set 1 and Set 2
(Set 1 consists of top 25 villages and Set 2 the remaining 25 villages).
(iii) Within a district two villages (one each from Set 1 and Set 2) have been
selected randomly from different tehsils. In case, there is only one tehsil available
in a district, both the villages have been selected from the same tehsil.
(iv) If in some UTs, the number of districts is less than three, minimum five villages
were selected from within UT.
(v) Sample size in some States, wherever required, was adjusted on the basis of
total rural population of the State.
(vi) Selected villages in a State/UT were distributed over four weeks of a month to
take into account week to week variation in prices.
2 - Methods of Measuring Inflation : Consumer Price Indices (CPI)
Selection of Towns and Villages for Price Collection
(vii) In the selected villages, market survey was undertaken for: (a) identification
of popular markets, (b) selection of shops/outlets for different commodities in
the selected markets, and (c) determination of specifications of commodities to
be priced.
2 - Methods of Measuring Inflation : Consumer Price Indices (CPI)
Selection of Towns and Villages for Price Collection
URBAN
(i) All cities/towns having population (Census, 2001) more than nine lakh and
State/UT capitals not covered therein have been selected purposively. Price
markets have been allotted to these cities/towns as per the following criteria –

Selection of Towns and Villages for Price Collection

(ii) After selecting and allocating the markets in towns/cities, purposively (as stated above),
remaining markets have been allocated to each State/ UTs in proportion to their urban
population as per Census 2001. For allocation within State/UTs, remaining towns have
been classified into four strata according to the population size, as given below:-
2 - Methods of Measuring Inflation : Consumer Price Indices (CPI)
Selection of Towns and Villages for Price Collection
• In all, 310 towns have been selected covering all the States and UTs from which 1114
price quotations are to be canvassed every month.
• Markets allocated to a particular town have been distributed by ensuring both the
geographical coverage of the selected town and the different segments of population
living in the town (poor, middle and affluent). Further, markets allotted for the town have
been distributed over the four weeks of a month to take into account week to week
variation in prices.
2 - Methods of Measuring Inflation : Consumer Price Indices (CPI)

Fixing of Specifications
• For selected villages and towns, market survey has been undertaken for (a)
identification of popular markets, (b) selection of shops/outlets for different
commodities in the selected markets and (c) determination of specifications of
commodities to be priced. Specification is Structured Product Description (SPD), which
uniquely identifies a product/item. It contains price determining characteristic of an
item e.g. brand, variety, unit, quantity etc. Rented dwellings, from which house rent
data are to be collected, were also identified in all the selected towns during the
market survey. A total of 13,368 dwelling units of different types, covering 310 towns,
are in the sample for collection of rent data.

Web Portal for Data Transmission

• unique feature of the system of compilation of Consumer Price Index is the online
transmission of price data. This is a completely paperless survey in the sense that no
paper schedules are used for transmission of data. Two independent web portals for
rural and urban price data have been developed by the National Informatics Centre
(NIC). These portals are user id and password protected. Provision on web portal has
also been made for (i) on line data entry, (ii) uploading of data entered in the off line
mode, and (iii) generation of scrutiny tables (Diagnostic Tables) giving price variations
exceeding certain limits for verification and updation of price data. Various activities
like – data entry, uploading, scrutiny can be monitored with the help of these portals.
Field work in urban and rural areas is undertaken by the Field Operations Division of
National Sample Survey Office and Department of Posts, respectively.
2 - Methods of Measuring Inflation : Consumer Price Indices (CPI)

Base Year

Though the Weight Reference Year is July 2011 to June

2012 (reference period of NSS 68th Round), Price
Reference Year (Base Year) has been chosen to be
calendar year 2012. Reasons for this deviation are:
• Internationally, the calendar year is adopted as the
base year.
• Taking July 2011 to June 2012 as Base Year would be
too close to the Base Year of the existing series
(which was 2010).
• Financial year April 2011 to March 2012 could not
be considered as some months of the year preceded
the Weight Reference Year.
2 - Methods of Measuring Inflation : Consumer Price Indices (CPI)
Compilation of Indices
• Compilation of CPI numbers generally consists of two stages –
• (a) First, price indices are calculated for elementary aggregates, which
are known as Item Level indices. These elementary indices are the
lowest level of aggregation where prices are combined into price indices.
It is also the lowest level of aggregation for which explicit expenditure
weights are available.
• (b) Then, these elementary price indices are averaged (aggregated) to
obtain higher level indices using consumption expenditure as weights,
associated with each level. For this purpose, Laspeyeres index formula is
used. This explains, why the CPI is often described as a fixed-weighted
index or fixed-basket index.
• Laspeyres index formula can be expressed algebraically, in usual
notations, as:
2 - Methods of Measuring Inflation : Consumer Price Indices (CPI)

Compilation of Indices
• Thus, equation (B) represents the weighted average of elementary
price indices(/) relating to each individual item i. Theoretically, and
are the averages of the prices collected from different markets for
ith item in the current year and base year respectively. In our
case,(in a given market), is the Geometric Mean (GM) of the
monthly prices for the Base Year 2012 and is the corresponding
current month price. As mentioned earlier, the specifications of ith
item are different across markets/outlets, therefore, instead of the
ratio of the averages of current period to base year prices, average
of price relatives (current month price/base year price) has been
taken as elementary index of ith item. It is important to mention
here that GM has been used for averaging the price relatives of ith
item across all markets/quotations. GM has the property that ratio
of the averages and average of the ratios are same. Thus, the
deviation from the theory is nullified by adopting GM for
compilation of elementary indices. It may be noted that this is in
consonance with the international practice.
 2 - Methods of Measuring Inflation : Consumer Price Indices (CPI)

Compilation of Indices
• If a non-seasonal item is temporarily out of stock and no
price is reported, the price has to be imputed. A price may
be considered as temporarily missing if the same product is
likely to return to the market within reasonable time period.
The current month price is imputed/derived by multiplying
price of the same item in the previous month with average
price relative of current month prices to last month prices
for rest of markets of the same item where both current
and previous month prices are available. The imputation is
done within town in case of CPI (Urban) and within state in
case of CPI (Rural). The formula is as given below:
 2 - Methods of Measuring Inflation : Consumer Price Indices (CPI)

Compilation of Indices
• It happens many times that the particular specification of item becomes unpopular
among consumers and disappears from market, or the selected outlet has stopped
selling that product. In case of former, the item is to be substituted, whereas in later
case shop is to be substituted. There may be the case when both are substituted.
There is a provision to provide ‘Special Codes’, to indicate the cases, which are given
below:
2 - Methods of Measuring Inflation : Consumer Price Indices (CPI)

Dissemination of Indices
• The Consumer Price Index is released every month at 5.30 p.m. on 12th day of the
following month. If it is a holiday, then it is released on the next working day. All-
India CPIs (Rural, Urban, Combined) along with inflation rates for Sub-group, Group,
CFPI and General Index (All-Groups) are released through a Press Note.

Linking Factor
• It is also necessary to have a linking factor between the old series and the revised
series, in order to project the old series from January 2015 onwards. Linking factors
for Groups as well as All Groups are also released. These linking factors are the ratio
of the GMs of the respective indices of the old series and revised series for the year
2014. The linking factors are as follows:
2 - Methods of Measuring Inflation : Consumer Price Indices (CPI)

Impact of shifting from AM to GM for

compilation of elementary/item indices

We know that the GM is least affected by

the extreme values, therefore, it reduces
the volatility of indices that may be
caused due to inevitable outliers present
in the data. Further, for all positive
numbers, GM is always lesser than the
AM. Therefore, the levels of indices based
on GM of price relatives would always be
lower than that of based on AMs.
Methods of
Measuring
Inflation
 Methods of
Measuring Inflation
India's retail price inflation rate stood at 3.15 percent year-on-year in July 2019, little-
changed from the previous month's 3.18 percent and slightly below market
expectations of 3.20 percent. Inflation remained below the Reserve Bank of India's
medium-term target of 4 percent for the twelfth consecutive month, despite recent interest
rate cuts.

Food prices rose 2.36 percent from a year earlier in July, the biggest gain since June
2018. Also, the food & beverages index went up 2.33 percent, with main upward pressure
coming from: meat & fish (9.05 percent); vegetables (2.82 percent); non-alcoholic beverages
(3.38 percent); prepared meals, snacks, sweets etc. (2.56 percent); pulses & products (6.82
percent); egg (0.57 percent); cereals & products (1.31 percent); spices (2.02 percent); oils &
fats (0.91 percent); and milk & products (0.98 percent). By contrast, fruits prices dropped
0.86 percent and sugar & confectionery costs fell 2.11 percent.

Among non-food products, prices increased for housing (4.87 percent); miscellaneous (4.65
percent); pan, tobacco and intoxicants (4.89 percent); and clothing and footwear (1.65
percent). Fuel & light prices were 0.36 percent lower.

The corresponding provisional inflation rates for rural and urban areas were 2.19
percent and 4.22 percent, compared with June's figures of 2.21 percent and 4.33 percent
respectively.

On a monthly basis, consumer prices went up 0.91 percent in July.

Methods of Measuring Inflation
 Methods of Measuring Inflation
India July Inflation Rate Weaker than Expected
India' annual inflation rate eased to 4.17 percent in July 2018 from a downwardly revised 4.92
percent in the previous month, and below market expectations of 4.51 percent. Still, inflation
remained above the central bank's medium-term target of 4 percent for nine consecutive months.

Food and beverages inflation went down to 1.73 percent in July from 3.11 percent in June, with the food
index alone rising 1.37 percent (vs 2.91 percent in June). Inflation slowed for fruits (6.98 percent vs 10.06
percent); prepared meals, snacks, sweets etc. (4.46 percent vs 4.76 percent); milk and products (2.96
percent vs 3.04 percent); and non-alcoholic beverages (1.40 percent vs 1.96 percent). In addition, there
was a decline in prices of vegetables (-2.19 percent vs 7.80 percent); pulses and products (-8.91 percent
vs -10.87 percent); and sugar and confectionery (-5.81 percent vs -7.11 percent). On the other hand,
inflation picked up for eggs (7.41 percent vs 5.85 percent); oils and fats (2.79 percent vs 2.62 percent);
spices (2.66 percent vs 2.29 percent); and meat and fish (2.26 percent vs 2.20 percent).

Among non-food products, prices rose at a softer pace for: housing (8.30 percent vs 8.45 percent);
clothing and footwear (5.28 percent vs 5.60 percent); and pan, tobacco and intoxicants (6.34 percent vs
8.05 percent). Inflation rose for both fuel and light (7.96 percent vs 7.22 percent); and miscellaneous (5.80
percent vs 5.66 percent).

The corresponding provisional inflation rates for rural and urban areas were 4.11 percent and 4.32
percent, compared with June's figures of 4.93 percent and 4.85 percent respectively.

On a monthly basis, consumer prices increased 0.94 percent in July, after a revised 0.51 percent gain in
June.
Methods of Measuring Inflation
Methods of
Measuring
Inflation
Methods of Measuring Inflation
Methods of Measuring Inflation
Methods of Measuring Inflation
Methods of Measuring Inflation
2 - Methods of Measuring Inflation : Consumer Price Indices (CPI)
2 - Methods of Measuring Inflation : Consumer Price Indices (CPI)
 India Inflation Rate Rises to 2.36% in July

▪ India's consumer prices increased 2.36 percent year-on-year in July

2017, beating market expectations of 1.87 percent and following a
1.54 percent gain in the previous month. Cost of housing, energy and
clothing rose further and food prices fell at a softer pace.
▪ Prices grew at a faster pace for: Fuel and light (4.86 percent from
4.54 percent), clothing and footwear (4.22 percent from 4.17
percent) and housing (4.98 percent from 4.7 percent).
▪ Meanwhile, cost of food fell at a slower 0.29 percent after declining
by 2.12 percent in June. While prices of vegetables fell less (-3.57
from -16.53 percent in June) and fruits inflation was higher (2.83
percent from 1.98 percent), cost of pulses declined further (-24.75
percent from -21.92 percent).
▪ The corresponding provisional inflation rates for rural and urban
areas are 2.41 percent and 2.17 percent (1.52 percent and 1.41
percent respectively in June).
2 - Methods of Measuring Inflation : Consumer Price Indices (CPI)

Inflation Rate from 1969 to 2013

2 - Methods of Measuring Inflation : Consumer Price Indices (CPI)
2 - Methods of Measuring Inflation : Consumer Price Indices (CPI)
2 - Methods of Measuring Inflation : Consumer Price Indices (CPI)
2 - Methods of Measuring Inflation : Consumer Price Indices (CPI)
CPI Indexes
GDP Deflator in India increased to 134.80 Index Points in 2019 from
129.70 Index Points in 2018. GDP Deflator in India averaged 119.53 Index
Points from 2005 until 2019, reaching an all time high of 146.50 Index
Points in 2011 and a record low of 100 Index Points in 2005.
3 - Methods of Measuring Inflation: GDP Deflator
3 - Methods of Measuring Inflation: GDP Deflator
3 - Methods of Measuring Inflation: GDP Deflator
3 - Methods of Measuring Inflation: GDP Deflator
Case New WPI series: India moves to concept of producer price index to better gauge
1 actual price pressure in economy By: FE Bureau | New Delhi | Updated: May 13, 2017 6:43 AM

The new wholesale The move will also

price index (WPI) series mean that when the
with 2011-12 as base goods and services
year, announced on The removal of the tax (GST) is
Friday, departed from duty component introduced from
the established practice reflects the fact that July, the WPI won’t
to scrap the indirect tax WPI inflation, reflect it, while
component from the according to the new consumer price
price of goods to series, is much lower inflation will
remove the impact of the level reported
fiscal policy on inflation. continue to capture
under the old series such tax component
The change signals
with 2004-05 as the built into the retail
India’s move towards
the concept of base year — only 1.7% price of goods and
producers’ price index in 2016-17 against services. This could
to better gauge the 3.7% reported earlier. potentially result in
actual price pressure in a sudden bout of
the economy at the WPI-CPI divergence.
wholesale level.
New WPI series: India moves to concept of producer price index to better gauge
actual price pressure in economy
Also, the government will gauge
Since WPI is used in the the prices of seasonal fruits and
deflator to estimate real vegetables for a much longer
growth in gross Chief statistician
period, and not just during the
domestic product and TCA Anant said: season. A new WPI food index
gross value added “Since the GST will also be launched, just like the
(GVA), the lower WPI will be captured one that tracks retail food
numbers from 2012-13 on the final point inflation.
to 2016-17 on a new of sale, it will be However, while the new WPI
base could lead to series will reflect more
reflected only in adequately the changing
upward revision of such the CPI. So the
growth data. Since WPI consumption pattern in the
GST will account economy and better capture the
is used as a part of the
deflator to calculate the for a certain price pressure at the
degree of producer/wholesale level, it may
real growth of GVA,
divergence not necessarily narrow its huge
removing such tax divergence with the consumer
component from the between the new price index-based inflation
WPI is integral to the WPI data and the witnessed in recent years, partly
fact that the GVA CPI data.” due to the huge difference in the
doesn’t factor in indirect composition of the two price
taxes. gauges.
Case Reasons to Use WPI Instead of CPI to Calculate Inflation(before
2 December 2014)?

In India, we do not
have one CPI WPI has a broader
Data on Wholesale calculated per se. we coverage compared
Price Index (WPI) is have three such CPIs, to all the CPIs, in
available every CPI for Industrial terms of the
week, while data on Workers (CPI-IW). CPI commodities
Consumer Price for agricultural covered,
Index (CPI) is only laborers and CPI for quotations, larger
available every rural laborers. The number of non-
month, so there is a argument used agricultural
time lag in CPI data therefore is that there products and
is no one CPI value
availability tradable items,
which can be used for
compared to WPI which are missing
decision making by
data availability. in the CPIs.
either RBI or the
Government of India.
Reasons to Use WPI Instead of CPI to Calculate Inflation(before December 2014)?

Interest rates which the RBI

controls may not have
much of a correlation with
high food prices and
WPI is calculated on an all
therefore decision makers
India basis, while CPI is
may feel that since they
calculated for specific
can't target inflation across
centers in India and then
major sections constituting
this is aggregated to an all
the CPI, they would rather
India index.
focus on WPI constituted of
goods on whose demand
interest rates may have a
more significant impact.
 Discussion

Why India is shifting from WPI to CPI for

calculating Inflation?
Is CPI a better inflation indicator than WPI?

▪Conceptually, retail inflation price rise driven by

potential consumer demand and available supply is a
better indicator of inflation for guiding monetary policy
decisions than WPI inflation.

▪Even the former RBI governor D Subbarao admitted as

much. The release of CPI data, with a shorter time lag
and availability of a single all-India measure of retail
inflation, could prompt RBI to move towards CPI or its
variation as a primary measure of inflation.
Is CPI a better inflation indicator than WPI?
So far, RBI chose the wholesale price index or WPI over CPI,
largely for two reasons.
1. First, until 2011, there was no single CPI, representative
of the whole country. There were three or four CPI
measures, relevant for different segments of population.
Now, we have one representative measure of retail
inflation with further disaggregation to see how prices
in rural and urban India are changing.
2. Second, WPI was earlier available with a shorter lag only
a 2-week delay compared with CPI inflation which came
with a 2-month lag. Now, CPI monthly inflation data is
released(12th of the month) couple of days prior to WPI
inflation data(14th of the month) for the same month.
Is CPI a better inflation indicator than WPI?
The conceptual case for moving to CPI rests on two points.
1. First, WPI excludes prices of services such as education, healthcare,
and rents. However, services now account for nearly 60 per cent of
GDP and a vast majority of these services are not traded with other
countries. As a result, inflation in these services is largely determined
by the domestic demand-supply situation. Conversely, the new CPI
measure assigns nearly 36%weightage on services and includes price
changes in housing, education, healthcare, transport and
communication, personal care and entertainment. CPI, therefore, is a
better reflector of demand side pressures in the economy, than
wholesale prices.
2. Second, WPI assigns nearly 15% and 10.7% weightage for the fuel
group and metal and metal products group, respectively. Any sharp
movements in international prices of fuels and metals, therefore, lead
to sharp changes in WPI. This was visible in calendar year 2009 when
WPI inflation fell below.
Government sets up a panel to devise new Producer
Price Index to replace Wholesale Price Index
 PPI
▪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.
▪The 13-member committee is headed by Professor BN Goldar and has
representation from various central ministries and departments.
▪WPI includes taxes while PPI tracks inflation minus tax component. The
most important part of PPI will be services, as currently there is no index
tracking inflation in the sector that contributes about 55% to India's GDP
▪PPI will track average change over time in selling prices received by
domestic producers for their output for both goods and services while
WPI tracks transaction only at the wholesale level for goods.
▪Prices included in PPI are from the first commercial transaction for many
products and some services. The committee will outline methodology and
timelines for launch of PPI series to initially run parallel to WPI and later
replace it.
 CPI Indexes

CPI-IW: The Consumer Price Index for the industrial workers

(CPI-IW) has 260 items (plus the services) in its basket with
2001 as the base year (the first base year was 1958–59). The
data is collected at 76 centres with one month’s frequency
and the index has a time lag of one month.

▪ Basically, this index specifies the government employees

(other than banks’ and embassies’ personnel).
▪ The wages/salaries of the central government employees
are revised on the basis of the changes occurring in this
index, the dearness allowance (DA) is announced twice a
year. When the Pay Commission recommends pay
revisions, the base is the CPI (IW).
 CPI Indexes
CPI-AL: The Consumer Price Index for Agricultural Labourers (CPI-AL) has
1986–87 as its base year with 260 commodities in its basket. The data is
collected in 600 villages with a monthly frequency and has three weeks
time lag.

▪ This index is used for revising minimum wages for agricultural

labourers in different states. As the consumption pattern of
agricultural labourers has changed since 1986–87 (its base year), the
Labour Bureau proposes to revise the existing base year of this index.
For the revision, the consumer expenditure data collected by the
NSSO during its 61st NSS Round (2004–05) is proposed to be used.
▪ The governments at the Centre and states remain vigilant regarding
the changes in this index as it shows the price impact on the most
vulnerable segment of the society, this segment spends almost 75 per
cent of its total income on the purchase of food articles.
Governments’ failure to stabilise the index in the long range can make
them politically volatile and be translated into political debacles. That
is why the FCI is always kept ready to supply cheaper foodgrains in the
situations of any price rise.
 CPI Indexes

CPI-RL: There is yet another Consumer Price Index for the

Rural Labourers (CPI-RL) with 1983 as the base year, data is
collected at 600 villages on monthly frequency with three
weeks time lag, its basket contains 260 commodities.

▪ The agricultural and rural labourers in India create an

overlap, i.e., the same labourers work as the rural
labourers once the farm sector has either low or no
employment scope. Probably, due to this reason this index
was dropped by the government in 2001–02. But after the
government government change at the Centre the index
was revived again.
 S U M M A RY
• Inflation means ‘persistent’ and appreciable
increase in general level of prices.
• Inflation is desirable at 1-2% in developed
countries and 4- 6% in less developed
countries.
S U M M A RY