Measurement of Inflation

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  • Inflation is measured by calculating the percentage rate of change of a price index, which is called the inflation rate.
  • Inflation is often measured either in terms of Wholesale Price Index (For Firms)or in terms of Consumer Price Index (For Home).
Wholesale Price Index(WPI)
            The Wholesale Price Index is an indicator designed to measure the changes in the price levels of commodities that flow into the wholesale trade intermediaries. It measures inflation at wholesale level, that impacts the manufacturers and firms.
  • It is the most widely used inflation indicator in India.
  • Published by the Office of Economic Adviser, Ministry of Commerce and Industry.
  • All transactions at the first point of bulk sale in the domestic market are included.
  • It shows the prices levels paid of firms and manufacturers.
  • The base year of All-India WPI has been revised from 2004-05 to 2011-12 in 2017.
This basket has been divided into three categories with 697 commodities
  • Primary articles: weightage is 20.118%
  • Energy and Fuel: Weightage is 14.910%
  • Manufactured Items: Weightage is 64.972%
Consumer Price Index (CPI)
            Consumer price index is specific to particular group in the population. It shows the cost of living of the group. It is based on the changes in the retail prices of goods or services (Retailer inflation). Based on their incomes, consumer spends money on these particular set of goods and services. There are different consumer price indices. Each index tracks the changes in the retail prices for different set of consumers.
  • It measures price changes from the perspective of a retail buyer.
  • It measures changes over time in the level of retail prices of selected goods and services on which consumers of a defined group spend their incomes.
Four types of CPI are as follows:
  1. CPI for Industrial Workers (IW) – 2001 (now changed to 2016)
  2. CPI for Agricultural Laborer (AL) - 1986-87
  3. CPI for Rural Laborer (RL) - 1984-85
  4. CPI (Urban non-Manual Employee) – 2001 – (discontinued from 2011)
Of these, the first three are compiled by the Labour Bureau in the Ministry of Labour and Employment. Fourth is compiled by the Central Statistical Organisation (CSO) in the Ministry of Statistics and Programme Implementation. (CSO is now called as ‘NSO’ - National Statistical Organisation or Office)
Base Revision of Consumer Price Index for Industrial Workers (CPI-IW)
  • The CPI-IW is compiled and disseminated by the Labour Bureau on a monthly basis.
  • It measures changes in the retail prices of a fixed basket of goods and services being consumed by an average working-class family.
  • Apart from serving as a guide for policy formulations these index numbers are utilized for fixing/revising wages, regulating the dearness allowance paid to large number of manual workers and Central/ State Govt. employees.
  • To capture the latest consumption pattern of working-class family, Labour Bureau has revised the base year of the existing from 2001 to 2016
  • The new series of CPI-IW covers the industrial workers from the existing seven sectors viz.
  • Mines, Plantation, Factories, Railways, Public Motor Transport Undertakings, Ports & Docks and Electricity Generating & Distributing Establishments
  • The new series has a wider coverage in terms of sample size, number of centres, markets/outlets, items etc.

Measurement of Inflation New CPI Series
            It was in 2011 that the government announced a new Consumer Price Index (CPI)
  1. CPI (Rural);
  2. CPI (Urban) and
  3. CPI (C) (where ‘C’ stands for ‘Combined’) – Maintain 2% - 6%
Base year was also revised from the existing 2010 to 2012 & published by CSO
WPI vs CPI
  • Food has higher weightage in CPI than in WPI.
  • Manufactured goods have higher weightage in WPI than in CPI.
  • WPI doesn’t include services, while CPI include services to a limited extent.
  • Fuel has higher weightage in WPI than in CPI.
  • WPI is more or less uniform across India, whereas CPI varies from region to region.
  • CPI (rural) doesn’t include housing, whereas CPI (urban) gives 6.84% value to the housing.
  • Fuel and Light has higher weightage in CPI (rural) than in CPI (urban).
  • Food and beverages has higher weightage in CPI (urban) than in CPI (Rural).
Measures to Control Inflation
1. Monetary Policy by RBI
(Control Money Supply in Nation: Govt Expenditure, Loan & Foreign Exchange).
  • Credit Control (Loan) - Monetary Policy Committee uses several instruments like CRR, SLR, Repo rate and Open market operations to regulate the inflation.
  • Demonetisation of Currency and reduction of money supply to bring down demand (Extreme cases).
  • Issue of New Currency: Entire money supply is demonetized and new currency is introduced. 1 unit of new currency is made equivalent to several unit of older currency.
2.Fiscal Policy by Government
  • Rationalisation of Expenditure Cut down of unnecessary expenditure will reduce the demand (Government Expenditure Reduce – Inflation above 6%, Govt Expenditure Increase – Inflation below 2%).
  • Increase in Direct Taxes reduces the disposable income in hands of households thus cutting down the demand.
  • Decrease in indirect taxes will bring down the cost of the commodities.
  • Surplus budget (rare occasions).
3.Administrative Measures
  • Rational wage policy to keep the wage rates under factors of production under control
  • Price Control by fixing the prices of goods and services (under Essential Commodities Act).
  • Strengthening the distribution system like PDS (Public Distribution System).
  • Easing the imports by cutting off Import duties and tariff restrictions
  • Export regulations

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