In India, two key indices, the WPI (Wholesale Price Index) and the CPI (Consumer Price Index), are used to assess wholesale and retail price fluctuations, respectively. The CPI measures the price differential between goods and services purchased by Indian consumers, such as food, medical care, education, and gadgets.
The WPI, on the other hand, captures the items or services sold by firms to smaller businesses for resale. WPI (Wholesale Price Index) and CPI (Consumer Price Index) are both used to calculate inflation in India.
How does India calculate inflation?
According to the Indian Ministry of Statistics and Programme Implementation, India’s inflation rate was 5.5 percent in May 2019. This is a little decrease from the previous annual result of 9.6 percent in June 2011. For all commodities, inflation rates in India are commonly expressed as changes in the Wholesale Price Index (WPI).
The consumer price index (CPI) is widely used as the primary indicator of inflation in many developing countries. The CPI (combined) has been named the new standard for calculating inflation in India (April 2014). CPI data is normally collected monthly and with a large lag, making it inappropriate for policymaking. Changes in the CPI are used to calculate India’s inflation rate.
The WPI is a price index that calculates the cost of a typical basket of wholesale items. Primary Articles (22.62 percent of total weight), Fuel and Power (13.15 percent), and Manufactured Products (13.15 percent) make up this basket in India (64.23 percent ). The weight of food articles from the Primary Articles Group is 15.26% of the overall weight. Food products (19.12 percent); chemicals and chemical products (12 percent); basic metals, alloys, and metal products (10.8 percent); machinery and machine tools (8.9 percent); textiles (7.3 percent); and transportation, equipment, and parts (7.3 percent) are the most important components of the Manufactured Products Group (5.2 percent ).
The Ministry of Commerce and Industry measured WPI data on a weekly basis.
As a result, it is more up-to-date than the trailing and rare CPI figure. Since 2009, however, it has been measured monthly rather than weekly.
How does the Reserve Bank of India (RBI) calculate inflation?
The Wholesale Price Index (WPI), the Implicit National Income Deflator (NID), or the Consumer Price Index can all be used to measure price fluctuation in India (CPI). In India, the WPI is the most commonly used metric of inflation.
What is the definition of inflation?
The Bureau of Labor Statistics (BLS) produces the Consumer Price Index (CPI), which is the most generally used gauge of inflation. The primary CPI (CPI-U) is meant to track price changes for urban consumers, who make up 93 percent of the population in the United States. It is, however, an average that does not reflect any one consumer’s experience.
Every month, the CPI is calculated using 80,000 items from a fixed basket of goods and services that represent what Americans buy in their daily lives, from gas and apples at the grocery store to cable TV and doctor appointments. To determine which goods belong in the basket and how much weight to attach to each item, the BLS uses the Consumer Expenditures Study, a survey of American families. Different prices are given different weights based on how essential they are to the average consumer. Changes in the price of chicken, for example, have a bigger impact on the CPI than changes in the price of tofu.
The CPI for Wage Earners and Clerical Workers is used by the federal government to calculate Social Security benefits for inflation.
In India, who measures inflation?
CPI stands for Consumer Price Index (CpI) A number of consumer pricing indexes are published by two government departments, the Ministry of Statistics and Programme Implementation (MOSPI) and the Ministry of Labour and Employment (Table 2). Each index has its own set of weights, and the base period utilized by each measure is different.
CPI or WPI: which is better?
“Conceptually, the CPI is a better predictor of demand side pressures than the WPIand there is no doubting that consumer prices reflect demand side pressures better than wholesale prices,” RBI governor D Subbarao said.
According to PTI, RBI governor D Subbarao stated on Tuesday that the consumer price index (CPI) captures market dynamics better than the wholesale pricing index (WPI) in arriving at a more accurate inflation estimate.
Mr Subbarao stated at the RBI’s Mint Road office that the CPI is a better predictor of demand side pressures than the WPI. “There is no doubting that consumer prices better reflect demand side pressures than wholesale prices,” he said.
The governor went on to say that a persistent rise in wholesale costs either leads to a price hike by retailers or a strain in their margins.
However, if demand is high, retailers may use their pricing power to pass on wholesale price increases to customers. Retailers will be compelled to partially absorb the increase in wholesale pricing in their margins if demand is insufficient, he warned.
“Given the limited efficacy of monetary policy to deal with food and fuel inflation, and the limitations on using core CPI inflation measures, we have focused our attention on non-food manufactured products inflation as an indicator of demand-side pressures in the economy,” Mr Subbarao said, defending the WPI’s use in the apex bank’s inflation forecast.
He acknowledged that the criticism of the RBI’s inflation forecasts, which have been off the mark, had some merit, but pointed out that the bank has also been off the mark “For a variety of reasons, we chose WPI over CPI as a second best option. First and foremost, we do not have a single CPI that is representative of the entire country.
“Until recently, we had four, and now we have three CPIs reflecting distinct sectors of the population,” he explained, noting that although the WPI is calculated on an all-India basis, CPIs are created for individual cities and then combined to create an all-India index.
“Second, WPI is available with less of a delay than CPIs. Third, in terms of the quantity of commodities, quotations, and inclusion of non-agricultural products and tradeable things, the WPI has a greater coverage than the CPIs “he stated
He noted that the WPI has been revised upwards in recent months, sometimes sharply, and that as a result, the RBI was compelled to alter its own inflation projection several times during the previous fiscal year.
He explained that core inflation is a derived inflation measure from headline inflation “Food and fuel, which are temporary components of the headline, are not included in this procedure. Although there are various statistical methods of exclusion, this is the normal practice.”
While commodity prices do influence the non-food manufactured products component of WPI, he maintained that the pass-through from higher commodity prices to WPI is highly dependent on the economy’s underlying demand fundamentals.
“In order to analyze inflation, the RBI considers all measures of inflation, both overall and disaggregated components, as well as other economic and financial data. It is critical to have a reliable primary measure of inflation at the national level for formulating monetary policy “he stated
The compilation and dissemination of CPI (urban), CPI (rural), and CPI for the country by the CSO is a significant step forward in this direction, but long time series data, particularly for the back period, is not available for these new indices, rendering them unsuitable for policy analysis, he said.
He said that the RBI had been left to guess on inflation statistics, claiming that dramatic variations in data supply had resulted in a systematic under-prediction of inflation numbers by the RBI last year, and that measures should be made to limit the magnitude and frequency of revisions.
Mr Subbarao admitted that, in general, private inflation forecasts came much closer to what was ultimately reported for last fiscal year, blaming the sharp rise in oil and commodity prices, lower-than-expected decline in food prices despite a normal monsoon, erroneous signals from the Index of Industrial Production (IIP) data, and more than expected upward revisions to past inflation data as the factors that led to the inflation miscalculation.
Although the WPI series was revised to the base of 2004-05 last year, the existing CPIs continue to use the old base-for CPI-RL (rural laborers) (1986-87), CPI-AL (agri labourers) (1986-87), and CPI-IW (industrial workers) (2001), making them ill-equipped to capture the price behavior caused by the rapid structural changes in the economy, he said.
He noted there is a tilt in the weights towards non-food manufactured products indicating changes in the production pattern over the decade, despite the fact that the changes in the weights for manufactured products are not significant even in the updated WPI base year.
Some crucial economic statistics, such as regular retail sales data, as well as data on employment and property sales, are not frequently compiled in the country, resulting in inflation figures that are half-baked or unrepresentative of actual demand and price fluctuations.
He went on to say that the more important figures on WPI inflation had also been subject to considerable revisions “WPI inflation was estimated to be 8.2 percent in January 2011 and 8.3 percent in February 2011. Both of these figures, however, were significantly revised upwards by 120 basis points (bps) each.
“It’s not always obvious whether the modifications are the result of one-off or systemic reasons. Nonetheless, every time we have to examine the inflation scenario, we are forced to second-guess how the provisional number will be updated “Mr. Subbarao expressed his thoughts.
“However, if the provisional data we enter into the econometric model is off-track and shows no regular trend, our inflation estimates will be off-track as well,” he concluded.
What exactly are CPI and WPI?
WPI estimates the average change in wholesale prices of commodities, whereas CPI calculates the average change in retail prices of goods and services. Inflation indices WPI (Wholesale Price Index) and CPI (Consumer Price Index) have recently been in the headlines.
What is the difference between WPI and CPI Upsc?
The Wholesale Price Index (WPI) for February 2021 was recently announced by the Office of the Economic Adviser, Department for Promotion of Industry and Internal Trade.
Key Points
- This is the highest level of wholesale inflation since November 2018, when it reached 4.47 percent.
- Food Inflation: In February, food inflation was 1.36 percent, compared to () 2.80 percent in January.
- Retail inflation was 5.03 percent in February, according to the Consumer Price Index (CPI).
Wholesale Price Index
- It tracks variations in the prices of commodities sold and traded in bulk by wholesalers to other merchants.
- The Ministry of Commerce and Industry’s Office of Economic Adviser publishes this report.
- The general population does not buy things at wholesale prices, which is a major critique of this index.
- In 2017, the base year of the All-India WPI was changed from 2004-05 to 2011-12.
Consumer Price Index
- It tracks price fluctuations from the standpoint of a consumer. The National Statistical Office publishes it (NSO).
- The CPI measures the price differential between goods and services purchased by Indian consumers, such as food, medical care, education, and gadgets.
- Food and beverages, fuel and light, housing and clothing, bedding and footwear are all part of the CPI.
- The first three are compiled by the Ministry of Labour and Employment’s Labour Bureau. The NSO of the Ministry of Statistics and Programme Implementation compiles the fourth.
- CPI data is used by the Monetary Policy Committee (MPC) to keep inflation under control. The Reserve Bank of India (RBI) adopted the CPI as its primary inflation indicator in April 2014.
Is the RBI after WPI?
The RBI’s present aim of headline CPI inflation would be improved by a mix of core wholesale price index (WPI) and core CPI inflation. This would help to strike a balance between producers’ and customers’ interests. This inflation indicator has a low standard deviation as well as a low mean inflation rate.
What are the three types of inflation measures?
“What people generally use when they use the CPI is the change in that index, which may be described as inflation,” Reed explained.
2. CPI, resulting in less food and energy
Each month, the BLS publishes the CPI, which includes a headline number that indicates how much the prices of the 80,000 items in the basket have changed. However, there is another statistic, which is frequently referred to as the “Food and energy prices are purposefully excluded from the “core” number because they fluctuate a lot. “It’s possible that increases in certain specific commodities don’t reflect long-term challenges,” Groshen added. “It’s possible that they’re just reflecting weather trends or whatever.”
3. Expenditures on personal consumption (PCE)
PCE can also be referred to as “Consumer expenditure.” The Bureau of Economic Analysis, which also calculates Gross Domestic Product, or GDP, is in charge of calculating it.
Some information from the CPI is actually used as inputs by the PCE. It just uses them in a new way. The CPI and the PCE, according to David Wasshausen, chief of the Bureau of Economic Analysis’ national income and wealth division, “are highly consistent with each other” and “convey the same story from period to period.”
The Federal Reserve declared in 2000 that it will shift its inflation target from the CPI to the PCE.
“One of the reasons the Fed wants to look at that pricing is that it fits into that GDP framework,” Wasshausen explained. “So they can assess the state of the economy? Is it expanding or contracting? Is it on track to meet its growth goals? Then let’s take a closer look at the prices that customers pay in the same exact context to see how that relates to our target inflation.”
4. Consumption by individuals Expenditures that do not include food and energy, or “PCE Core”
The Bureau of Economic Analysis releases a PCE figure that excludes food and energy, similar to how the Bureau of Labor Statistics publishes a CPI number that excludes food and energy. This is a good example “The Federal Reserve uses the “core” PCE number to determine its inflation objective. “Wasshausen explained, “This allows you to see a type of basic pattern of what inflation is happening in the consumer sector.”
What is the most accurate inflation indicator?
Because of the multiple ways the CPI is used, it has an impact on practically everyone in the United States. Here are some instances of how it’s used:
As a measure of the economy. The CPI is the most generally used metric of inflation, and it is sometimes used as a gauge of government economic policy efficacy. It offers government, business, labor, and private citizens with information regarding price changes in the economy, which they use as a guide for making economic decisions. In addition, the CPI is used by the President, Congress, and the Federal Reserve Board to help them formulate fiscal and monetary policy.
Other economic series can be used as a deflator. Other economic variables are adjusted for price changes and translated into inflation-free dollars using the CPI and its components. Retail sales, hourly and weekly earnings, and components of the National Income and Product Accounts are examples of statistics adjusted by the CPI.
The CPI is also used to calculate the purchasing power of a consumer’s dollar as a deflator. The consumer’s dollar’s purchasing power measures the change in the value of products and services that a dollar will buy at different times. In other words, as prices rise, the consumer’s dollar’s purchasing power decreases.
As a technique of changing the value of money. The CPI is frequently used to adjust consumer income payments (such as Social Security), to adjust income eligibility limits for government aid, and to offer automatic cost-of-living wage adjustments to millions of Americans. The CPI has an impact on the income of millions of Americans as a result of statutory action. The CPI is used to calculate cost-of-living adjustments for over 50 million Social Security beneficiaries, military retirees, and Federal Civil Service pensioners.
The use of the CPI to change the Federal income tax structure is another example of how dollar values can be adjusted. These adjustments keep tax rates from rising due to inflation. Changes in the CPI also influence the eligibility criteria for millions of food stamp recipients and students who eat lunch at school. Wage increases are often linked to the Consumer Price Index (CPI) in many collective bargaining agreements.