India will start releasing annual inflation data based on the consumer price index (CPI) every month starting on Tuesday, a move that is expected to make monetary policy more effective in addressing demand-driven price pressures.
It will be some time, however, before the new index replaces the wholesale price index (WPI) as India’s main inflation gauge.
Unlike most central banks, which mainly use the CPI to monitor inflation and set monetary policy, the Reserve Bank of India (RBI) focuses on the WPI to keep tabs on prices.
Since the WPI largely reflects price pressures experienced by producers, reliance on it renders monetary policy less effective in cooling prices at the retail level.
“Monetary policy needs to have an impact on demand-side (price) pressures. A good and broad-based (CPI) index should help in making the policy more effective,” said Anubhuti Sahay, senior economist at Standard Chartered Bank
WPI vs CPI
Most of the major economies like US, UK, Japan, France, Singapore have selected CPI as its official barometer to weigh its inflation. But our country, India, is amongst few countries of the world, which selected WPI as its official scale to measure the inflation in the economy.
The main difference between WPI and CPI is that wholesale price index measures inflation at each stage of production while consumer price index measures inflation only at final stage of production.
CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation.
CPI is a fixed quantity price index and considered by some a cost of living index. Under CPI, an index is scaled so that it is equal to 100 at a chosen point in time, so that all other values of the index are a percentage relative to this one.
In use of WPI there are certain problems which have been encountered.
· Economists say that main problem with WPI is that more than 100 out of 435 commodities included in the index have abstained to be important from consumption point of view. Take, for example, a commodity like coarse grains that go into making of livestock feed. This commodity is insignificant, but continues to be considered while measuring inflation.
· WPI measures general level of price changes either at level of wholesaler or at the producer and does not take into account the retail margins. Therefore we see here that WPI does give the true picture of inflation.
· In present day service sector plays a key role in indian economy. Consumers are spending loads of money on services like education and health. And these services are not incorpated in calculation of WPI.
· Moreover the inflation figures that we get on Friday hardly makes a differnce to consumers, as the commodites on which inflation is calculated are not part individual consumers budget. Therefore in order to know what exact number of inflation is affecting your budget , it is advisible you should do your own calculation. You can compare your expenditure for previous years and with present scenario required to maitain your lifestyle and you ill come to know that increase in expenditure would be a few times higher than the official inflation figure.
But it is not easy for country like india to adopt to CPI , as in India, there are four different types of CPI indices, and that makes switching over to the Index from WPI fairly ‘risky and unwieldy.’ The four CPI series are:
· CPI Industrial Workers;
· CPI Urban Non-Manual Employees;
· CPI Agricultural labourers; and
· CPI Rural labour.
Apart from this official staements say that there is too much of lag in reporting of CPI numbers, which makes it difficult for india to calcualte inflation based on CPI figures.
India calcualtes inflation on weekly basis , whereas CPI figures are available on monthly basis. So all this give little ground for indian government to adopt CPI in calculating inflation.
How to calculate the WPI or CPI?
Price of a bike was 30,000 in 2004 and now its close to 55,000/-
Price of one litre milk was 25 Rs. in 2004 and now it is almost 60/- (After Sharad Pawar advised all the dairies to buy an alarm, which rings at paheli taarikh every month to remind them to increase the price without fail)
So, What hurts to you more, or what hurts the people at large: bike price or milk price? ofcourse the milk price inflation because you need to buy it every day.
So when calculating the inflation, you need to ‘weight’ the products according to their usage.
The weightage given in WPI
It is something like this
1. Primary Articles (food,fruits etc):22%
2. Fuel, Power, Light & Lubricants :14%
3. Manufactured Products (biscuit,toothpaste):63%
And you get a number, we call it the WPI index number for the given year or given week or given month.
Suppose after calculation you get a number 110 on 1st August 2011.
For base year we assume that WPI is 100.
So there is 10% inflation.
Now on 1st September 2011, you calculate again with new price data and the number is 112. What does that mean? The inflation has increased by 12% compared to compared to base year AND inflation has increased by 1.8% compared to last month. i.e. (112-110)/110*100.
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