ALL ABOUT INFLATION

WRITTEN BY: JAYAPARAKASH "JP" NAYAK

DESPITE OF LOWER INFLATION and DEFLATION WHY THE PRICE OF MANY CONSUMER PRODUCT SOARING IN INDIA?

In India inflation is measured by using Wholesale Price Index (WPI) Model. In which inflation is calculated by taking basket of hundreds of common goods. The price increases is multiplied with their weightage or their relative importance as a percentage of consumer spending.

There are 435 commodities in India to form a part of the “Basket”. Data on the price level of each of these commodities is tracked through the WPI which is an indicator of movement in prices of commodities in all trade and transactions.

But prices of different commodities rise at different rates. So if items of higher weightage cost less (showing low inflation, like electronics products) and certain other items (of lower weightage like vegetables) cost more, the overall inflation rate will be reflected as low. However consumers will end up pay more for some commodities despite of being inflation rate is low. Like it is happening in India to the price of vegetables.

What’s wrong with India in case of measuring inflation?

· Wholesale price index (WPI) doesn’t properly measure the exact price rise and end consumer will experience because, as the name suggests, it is at the wholesale level.

· The main problem with WPI calculation is that more than 100 out of the 435 commodities included in the index have ceased to be important from the consumption point of view.

· India constituted the last WPI series of commodities in 1993-94, but has not been updated till now, so the effect may be expired.

· WPI is supposed to measure impact of prices on business. But India uses it to measure the impact on consumer. Man commodities not used b the consumer gets calculated in the index.

To understand the above let us get overview on the difference between WPI vs. CPI

Wholesale price index (WPI)-

A Wholesale Price Index (WPI) is the price of a representative basket of “wholesale goods”. The Wholesale Price Index focuses on the price of goods traded between corporations, rather than goods bought by consumers, which is measured by the Consumer Price Index. The purpose of the WPI is to monitor price movements that reflect supply and demand in industry, manufacturing and construction. This helps in analyzing both macroeconomic and microeconomic conditions. The wholesale price index consists of over 2,400 commodities globally.

Consumer price index (CPI)-

The Consumer Price Index measures prices of a selection of goods and services purchased by a "typical consumer”. The inflation rate is the percentage rate of change of a price index over time.

For instance, in January 2007, the U.S. Consumer Price Index was 202.416, and in January 2008 it was 211.080. The formula for calculating the annual percentage rate inflation in the CPI over the course of 2007 is

211.08-202.41/202.41=4.28%

The resulting inflation rate for the CPI in this one year period is 4.28%, meaning the general level of prices for typical U.S. consumers rose by approximately four percent in 2007.

What is the composition of the WPI in India?

The WPI has an All Commodities Index, which consists of four three major groups - Primary Articles; Fuel, Power, Light & Lubricants; and Manufactured Products. These are again broken up into smaller sub-groups. For instance, the primary articles group would have food articles, non-food articles and minerals. Each of these sub-groups would have several individual commodities in them.

All told, the current WPI tracks prices of 435 commodities, of which 98 are primary articles, 19 fall in the fuel, power, light & lubricants group and 318 are in the manufactured products group.

The WPI has been periodically revised from the time it was first constructed in the 1930s and for obvious reasons the weights have moved progressively in favor of manufactured products.

The current index, which uses 1993-94 as its base year, has weights of 22.025 for primary articles, 14.226 for fuel etc and 63.749 for manufactured products.