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Measurement of Inflation in India.

MEASUREMENT OF INFLATION

Inflation Indices

In India, CPI and WPI are two major indices for measuring inflation.

Comparison between WPI and CPI

  • The WPI was the main index for measurement of inflation in India till April 2014 when the RBI adopted CPI as the key measurement of inflation.
  • The WPI is computed by the Office of the Economic Adviser in the Ministry of Commerce and Industry, Government of India. CPI is of three types: CPI for industrial workers (DAT), CPI for agricultural labourers (AL)/rural labourers (RL), and 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.
  • Both WPI which is the main index for Measurement of inflation and CPI are released monthly.
  • In 2017, the base year for the calculation of WPI which is the main index for Measurement of inflation was changed to 2011-12. The base year for calculating the CPI is also 2011-12. Thus, the base year for WPI has been made the same as that of CPI. Earlier, the base year for calculating the WPI which is the index of Measurement of inflation was 2004-05.
  • There are 697 (earlier 676) items in the WPI. The numbers of items in the CPI basket are 448 in rural and 460 in urban.
  • The primary use of WPI which is the main index for Measurement of inflation is to have inflationary trend in the economy as a whole. However, CPI is used for calculating changes in the cost of living.
  • The WPI is based on wholesale prices for primary articles and ex-factory prices for manufactured products. On the other hand, CPI is based on retail prices, which include all distribution costs and taxes.
  • The prices for WPI which is the main index for Measurement of inflation are collected on voluntary basis, while the price data for CPI are collected by investigators by visiting markets.
  • The CPI covers only consumer goods and consumer services, while the WPI covers all goods, including intermediate goods transacted in the economy.
  • The WPI weights are primarily based on national accounts and enterprise survey data, and the CPI weights are derived from consumer expenditure survey data.

Note: The major changes in weights, number of items, and quotations between WPI 2004-05 and WPI 2011-12 are given in the following table:

Major Group Weights Number of items Number of quotations
  2004-05 2011-12 2004-05 2011-12 2004-05 2011-12
All commodities 100.00 100.00 676 697 5482 8331
Primary articles 20.12 22.62 102 117 579 983
Fuel and power 14.91 13.15 19 16 72 442
Manufactured products 64.97 64.23 555 564 4831 6906

 

The index basket of the new series has 697 items (as mentioned earlier), including 117 items for primary articles, 16 items for fuel and power, and 564 items for manufactured products.

Proportion of items in CPI

The items in CPI are divided into five main groups as follows:

Item group

 

Weightage(%)
Food and beverages

 

54.18

 

 

Pan, tobacco, and intoxicants

 

3.26

 

Clothing and footwear

 

7.36

 

Fuel and light

 

7.94

 

Miscellaneous

 

27.26

 

Total 100

 

Base year

The government has chosen an arbitrary year to be the base year and set that equal to 100. Currently, the base year is 2011-12. Every month, the Bureau of Labour Statistics (BLS) surveys prices around the country for a basket of products and publishes the results as a number. Let us assume for the sake of simplicity that the basket consists of one item and that one item costs ₹1 in 2012. The BLS published the index in 2012 at 100. If today the same item costs ₹1.85, the index would stand at 185.0. By itself, it does not tell us what the current inflation rate is.

Relevance of Base Year

The pattern of consumption by the people is ascertained in the base year as adopted at the discretion of the government. Accordingly, based on the pattern of consumption, the commodities are selected and weights are allocated to the commodities for inclusion in CPI. The weight allocated to each commodity reflects the amount of expenditure incurred on that particular commodity

Calculation of Inflation

Many people are confused by the difference between inflation and CPI. The CPI is, as its name implies, an index or “a number used to measure change in the cost of living”.

How does inflation or deflation relate to the CPI?

In order to calculate the inflation, we compare the CPI of the current month with the same month last year.

For instance, CPI (rural) values for November 2016-17 and November 2015-16 were 133.6 and 128.3, respectively.

Inflation rate (in rural areas) for the month of November 2016

(CPI November 2016 value – CPI November 2015 value)

=                                                                                                      x 100

(CPI November 2015)

(133.6 – 128.3)

=                                x100 = 4.13%
128.3

Thus, we can conclude that the CPI is used to calculate the actual inflation rate.

Base effect:

The consequence of abnormally high or low levels of measurement of  inflation in the same month of the previous year distorts headline inflation numbers for the present month. A base effect can make it difficult to accurately assess the inflation levels. In our example, the base month is November 2015.

MEASURES TO CONTROL INFLATION

  • Monetary measures: Inflation can be curtailed by controlling the money supply.
  • Fiscal measures: Inflation can be controlled by reducing government expenditure and increasing revenue collection.
  • Administrative measures: These measures refer to the actions undertaken by the government. Administrative measures such as a check on hoarding can also help in reducing prices.
  • Apart from these three measures, any change in demand and supply factors can also help in reducing inflation.

Indian Economy

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