Monday, January 11, 2010

How does India calculate Inflation?

Continuing from the last post, I'll try to discuss how India calculates Inflation and how is that different from the rest of the world. But first let's discuss what is Wholesale Price Index (WPI) and Consumer Price Index (CPI).

Wholesale Price Index - WPI was first published in 1902, and was one of the more economic indicators available to policy makers until it was replaced by most developed countries with the Consumer Price Index in the 1970s.

WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market. In India, a total of 435 commodities data on price level is tracked through WPI which is an indicator of movement in prices of commodities in all trade and transactions. It is also the price index which is available on a weekly basis with the shortest possible time lag only two weeks. The Indian government has taken WPI as an indicator of the rate of inflation in the economy.

Cosumer Price Index - CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation.

CPI is a fixed quantity price index and considered by some a cost of living index. Under CPI, an index is scaled so that it is equal to 100 at a chosen point in time, so that all other values of the index are a percentage relative to this one.

India is the only major country that uses a wholesale index to measure inflation. Most countries use the CPI as a measure of inflation, as this actually measures the increase in price that a consumer will ultimately have to pay for. WPI does not properly measure the exact price rise an end-consumer will experience because, as the name suggests, it is at the wholesale level.

WPI is basically helpful to measure the inflation at business level but we are using this to measure the inflation at consumer level. Moreover, it doesn't take into account most of the services relevant to today's consumer since it was last updated in 1993-94.

What should we do to counter inflation? Wait till the next post...


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