Inflation

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(i) Wholesale Price Index (WPI): The Wholesale Price Index is released by Office of Economic Advisor, Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry.  The index consists of weighted price of commodities and is compared against the prices of a benchmark year.  Currently base year for All India WPI is 2011-12 as revised from the previous base year of 2004-05 by the Office of Economic Advisor (OEA) to align it with the base year of other macroeconomic indicators like the Gross Domestic Product (GDP) and Index of Industrial Production (IIP) vide press note dated 12.05.2017. This is seventh revision.  The earlier six revisions are in 1952-53, 1961-62, 1970-71, 1981-82, 1993-94 and 2004-05.  Key highlights of the revised guidelines are

  1. WPI will continue to constitute three Major Groups namely Primary Articles, Fuel & Power and Manufactured Products
  2. Increase in number of items from 676 to 697. In all 199 new items have been added and 146 old items have been dropped.  The category wise constitution of Major Group items is – 117 items for Primary Articles, 16 items for Fuel & Power and 564 items for Manufactured Products.

The index is fixed at 100.  The weightage of three groups is Primary Article – 22.62, Fuel & Power – 13.15, and Manufactured Products – 64.23.   The provisional monthly data is released on every 14th of the month and on next working day if 14th is a holiday. 

(ii) CPI Consumer Price Index (CPI): Consumer Price Index (CPI) is an economic indicator. It is a measure of change in the prices of consumer goods and services purchased by households. Consumer Price Index is the retail price average of a basket of goods and services directly consumed by the people.

The index is maintained by Ministry of Statistics & Programme Implementation. A new index was put in place by the Indian Government in 2011 and 2011-12 has been taken as base year with effect from release of CPI data for the month of January 2015.  The value of price index of items for year 2012 has been placed at 100.   

The index has following 6 categories and constitute weightage as per March 2024 CPI release by the ministry is as under:-

  1. Food, beverages and tobacco – 54.18% 
  2. Pan Tabacco and Intoxicants – 3.26%
  3. Clothing and Footwear – 7.36%
  4. Housing – (No weightage as of now)
  5. Fuel and Light – 7.94%
  6. Miscellaneous* – 27.26%           

*Miscellaneous consists items with major weightage like House hold goods and services, Health, Transport and communications, Personal care and effect etc.

There are separate indexes for Urban and Rural areas. The nationwide CPI is obtained by combining the rural and urban CPIs with appropriate weights.  Monthly price data are collected from 1114 markets in 310 selected towns by the Field Operations Division of NSSO and the specified State/UT Directorates of Economics and Statistics and from 1181 selected villages by the Department of Posts.  The consumer price index is a good indicator of inflation across categories.  It is more accurate measure of inflation for common consumer.  Dearness Allowances are calculated on the basis of CPI.

(iii) Types of Inflation: Inflation is the rate at which prices of goods and services increase.  It is an indication of the rise in the general level of prices over time.  Inflation (or rise in prices of goods and services) can be due to mainly two reasons i.e. more demand or less supply.

  • Core Inflation: When we measure Core Inflation we exclude items which face transitory pricing movements like food and energy items.  It is also called long term inflation. The core Inflation is considered to be basically demand driven inflation.   
  • Demand Pull Inflation: When the economy is having excess money, there is more demand for goods and services leading to rise in their prices, called Demand Pull Inflation.
  • Cost Push Inflation: is due to rise in prices of raw material or cost of production resulting in enhanced price of final goods and services.  This type of inflation is called Cost Push Inflation.

(iv) Calculating Inflation: Due to innumerable goods and services produced in a country it is practically impossible to find out the average change in prices of all these goods and services traded in an economy.  Therefore, a sample set or a basket of goods and services is used to get an indicative figure of the change in prices, which we call the inflation rate.

Inflation is calculated as the percentage rate of change of a certain price index. Consumer Price Index is widely used for calculating inflation, the countries like USA, UK, Japan, China use CPI for calculating inflation.  India has also moved from WPI to CPI for calculation of Inflation with effect from April 2014. 

If we have the CPI values of two different times, say, beginning of the year and end of the year, the inflation rate for the year will be,

(CPI of end of year – CPI of beginning of year) x 100/CPI of beginning of year

If CPI on 01.01. 2023 is 105 and CPI of 01.01.2024 is 110 then inflation rate for the year 2024 is,

(110 – 105) x 100 /105= 4.76%, therefore inflation rate for the period is 4.76%.

(v) Controlling Inflation: Inflation is the rise in price levels in an economy over a given time period. This means that a given amount of currency will buy a lower number of goods as time passes as it loses its value. So, controlling inflation is one of the main economic objectives of a government. Inflation is mainly controlled by measures aimed at either increasing aggregate supply or decreasing aggregate demand.

  1. Monetary Measures: A government’s monetary policy can decrease aggregate demand by increasing interest rates. This will discourage borrowing and increase savings, both of which constrict consumption, thereby decreasing aggregate demand. These measures are usually taken through Central Bank of the Country and are called Monetary measures. In India, RBI takes measures like hiking CRR, Bank Rate, Repo Rate, Reverse Repo Rate etc. i.e. Liquidity Management Facility
  2. Fiscal Policies: The government can increase taxation and decrease government spending. This will result in consumers and firms having less to spend, therefore coupled with the lower government spending this will reduce aggregate demand. Subsidising the costs of firms will decrease production cost allowing them to lower their prices, also reducing inflation. Reducing tariffs on imports will also lead to lower prices and therefore lower cost-push inflation. In conclusion short term measures to control inflation seek to decrease aggregate demand, whereas long term solutions tend to increase aggregate supply.  The Indian government usually takes fiscal measures like reduction in import duties, permitting import of good not previously permitted etc.
  3. Administrative Measures: These are taken by government like banning export of particular goods, suspension of future trading in commodities.  The stock limits for commodities can be prescribed by the government