Inflation Measurement - WPI & CPI...Whats New?

The latest WPI  has a basket of 676 items with 5482 quotations.     The major criticism for this index is that 'the general public does not buy at the wholesale level',   thus WPI does not give the actual feeling of the amount of pressure borne by the general public.   However,  the increase in wholesale prices does affect the retail prices and as such give some feel of the consumer prices.

Consumer Price Index (CPI)

The CPI measures price change from the perspective of the retail buyer. It is the real index for the common people. It reflects the actual inflation that is borne by the individual.  CPI is designed to measure changes over time in the level of retail prices of selected goods and services on which consumers of a defined group spend their incomes.   Till January 2012, in India there were only  following four CPIs compiled and released on national level.    (In some countries like UK, Malaysia, Poland it is also known as Retail Price Index).

(1) Industrial Workers (IW) (base 2001),

(2) Agricultural Labourer (AL) (base 1986-87) and

(3) Rural Labourer (RL) (base 1986-87)

(4) Urban Non-Manual Employees (UNME) (base 1984-85),

The first three are compiled by the Labour Bureau in the Ministry of Labour and Employment, and the fourth is compiled by Central Statistical Organisation (CSO) in the Ministry of Statistics and Programme Implementation.   These four CPIs reflect the effect of price fluctuations of various goods and services consumed by specific segments of population in the country.   These indices did not encompass all the segments of the population and thus, did not reflect the true picture of the price behaviour in the country as a whole.  

New Series of CPI Started in 2012

Therefore, there was a strong feeling that there is a need for compiling  CPI for entire urban and rural population of the country to measure the inflation in Indian economy based on CPI.    Thus, now Central Statistics Office (CSO) of the Ministry of Statistics and Programme Implementation has started compiling a new series of CPI for with the following measures:

(a) CPI for the entire urban population viz CPI (Urban);

(b) CPI for the entire rural population viz CPI (Rural)

(c) Consolidated CPI for Urban + Rural will also be compiled based  

     on above two CPIs

These  would reflect the changes in the price level of various goods and services consumed bythe Urban and rural population.   These new indices are now compiled at State / UT and all India levels.

The CPI inflation series is wider in scope than the one based on the wholesale price index (WPI), as it has both rural and urban figures, besides state-wise data. The new series, with 2010 as the base year, also includes services, which is not the case with the WPI series.   However, this new series will become comparable only in 2013 when the data for 2012 will also be available for comparison.

A comparison of this new series with WPI is given below :-

	WPI	CPI - New Series wef Feb 2012
Base Year	2004-05	2010
Elementary Items	676	200 (Weighted items)
Weightage of Food products (%)	243	49.71
Weightage of Energy products (%)	14..91	9.49
Weightage of Miscellaneous Items (%)	Services not included	26.31

Producer Price Indexes (PPI) – 

These are indices that measure the average change over time in selling prices by producers of goods and services. They measure price change from the point of view of the seller. Majority of OECD countries measure inflation based on Producer Price Indiex (PPI) while only some others use WPI.  Countries like Japan, Greece, Norway and Turkey use WPI.   Already WPI has been replaced in most of the countries by PPI due to the broader coverage provided by the PPI in terms of products and industries and the conceptual concordance between PPI and system the national account.   PPI is considered to be more relevant and technically superior compared to one at wholesale level.   However, in India we are still continuing with WPI.

Cost-of-living indices (COLI):  

This is different from CPI.   This index aims to measure the effects of price changes on the cost of achieving a constant standard of living (i.e. level of utility or welfare) as distinct from maintaining the purchasing power to buy a fixed consumption basket of good and services.   Maintaining a constant standard of living does not imply continuing to consume a fixed basket of goods and services. A COLI allows for the fact that households who seek to maximize their welfare from a given expenditure can benefit by adjusting their expenditure patterns to take account of changing relative prices by substituting goods that have become relatively cheaper, for goods that have become relatively dearer.   The use or preference for particular goods may also change.  

In the long run, the various PPIs, WPIs and the CPI show a similar rate of inflation. In the short run PPIs often increase before the WPI and CPI. Investors generally follow the CPI more than the PPIs. In India WPI is used instead of CPI.

In News Recently :

What is Core Inflation : The concept is used to estimate the inflation by excluding food and energy prices from the basket of goods and services that represents a typical household's consumption.   In mid 2012, RBI Governor threw up the conundrum posed by this "Core"inflation by saying "In our economy, where food constitutes nearly 50% of consumption basket and fuel has a weight of 15%, can a measure of inflation that excludes them can be called "Core".   He suggested that India should move towards developing and using a Producer Price Index (PPI) to gauge inflation more accurately as wholesale price index does not capture the price movement of services and is a hybrid of consumer and producer price quotes.