Wednesday, 11 April 2012

Inflation Indices: WPI, CPI...


Wholesale Price Index:

To calculate inflation, the inflation-computing agency collects the prices of identified commodities. The agency can take into account wholesale prices, retail prices or factory-gate prices. As wholesale markets are few in number, it is easier to collect the prices of goods traded there.

A new series of WPI was launched in 2010 with 2004-05 as the base year. This was done so that WPI by reflecting the consumption pattern of people will truly reflect price rise. The new index will have 676 items up from 435 items of the previous index.The 100-point index is subdivided into three groups.

  1. Primary article group: which include food and non-food agricultural products- 102 items with 22% weightage
  2. Fuel and Power category: 19 items with 13% weightage
  3. Manufactured products: 555 items with a weightage of 65%

WPI is compiled and published by Office of the Economic Advisor on a monthly basis, but till recently the WPI for primary articles and fuel group was also being released on a weekly basis. However the Ministry of Commerce and Industry has recently made a decision (in Jan 2012) to discontinue the weekly WPI of primary articles and fuel and power components. This is because these two components are traditionally some of the most volatile components of the price index. The Cabinet Committee on Economic Affair believes that these data add little analytical value but possibly misrepresent changes in India’s inflation scenario. For example, in 2011, implied primary articles weekly inflation ranges from as low as 0.1% to 19.8%, whereas the range of monthly primary articles inflation figures were substantially more subdued at 3.1% to 18.4%. Therefore henceforth WPI shall be released on a monthly basis alone.

Consumer Price Index

Consumer Price Index is a measure of the change in retail prices of goods and services consumed by defined population group in a given area with reference to a base year. This basket of goods and services represents the level of living or the utility derived by the consumers at given levels of their income, prices and tastes. CPI is used by the government, private sector, embassies, etc to compute the dearness allowance (DA).

Presently the consumer price indices compiled in India are:
  1. CPI for Industrial workers CPI(IW),
  2. CPI for Agricultural Labourers CPI(AL) & Rural Labourers CPI(RL), and
The CPI(IW) and CPI(AL& RL) compiled are occupation specific and centre specific and are compiled by Labour Bureau. This means that these index numbers measure changes in the retail price of the basket of goods and services consumed by the specific occupational groups in the specific centres.

  1. CPI ( Urban) and  CPI(Rural) - covering 310 towns and 1181 villages repsectively

  • Consumer Price Index for Urban Non Manual Employees which was earlier computed by Central Statistical Organisation, has been discontinued since April 2008.


In Feb 2011, India introduced two new consumer price indices: CPI(Urban) and CPI(Rural) which have a wider coverage of population. New CPI has 5 sub-groups:
  1. Housing;
  2. Food, beverages and tobacco;
  3. Fuel and light;
  4. Clothing, bedding and footwear;
  5. Miscellaneous.  
The new indices will temporarily have calendar 2010 as the base year, which will be shifted to 2011-12.  This index compiled by Central Statistical Organisation tries to encompass the entire population and is likely to replace all the other indices presently compiled. It has been argued that as this CPI will also consist of service sector data, it should become the key inflation indicator. 5

Work for a comprehensive CPI started in 2008 when the country saw an inflationary surge as measured by WPI. The finance ministry instructed the statistics ministry to hasten the process for releasing an all-India CPI as it was of the view that WPI-based inflation overstated the level of the price rise in the economy.

Until now, “inflation” was a reference to the WPI, but this national consumer price index (CPI) is expected to eventually replace the Wholesale Price Index (WPI) as a benchmark for inflation.

Central banks across the world rely mostly on CPI data to decide monetary policy, unlike RBI, which uses WPI as the key inflation index. However it is unlikely that RBI will move in haste to adopt the new CPI as a benchmark. It has been argued that given the economic and demographic diversity that exists in India, a combination of different measures of inflation gives useful information on diverse aspects that is found to be meaningful in formulating an appropriate policy. Relying on a single index might result in loss of information on some crucial sectors and might be less useful in tackling the diversity of issues.

Private Final Consumption Expenditure Deflator (PFCED)Price changes may cause consumers to switch from one good to another. Whereas the fixed basket CPI does not account for altered spending habits caused by price changes, the PFCED's ability to account for such substitutions makes it an alternative preferred measure of inflation. Movement of the consumption pattern of a country can be analyzed through its deflator generated by private final consumption expenditure (PFCE) at current prices over constant prices base 2004-5. 

Apart from WPI and CPI also in the offing are:

-          Service Price Index (SPI): India will soon have indices measuring price changes in services which account for above 60% of the national income, helping in more accurate measures of inflation. The government has shortlisted 10 sectors for which indices will be created- namely transport, banking, insurance, communication, ports and storage, Defence services, health, education. All the indices will add up to a single index for services.

-          Producer Price Index (PPI): The PPI would reflect changes in the prices of manufactured items at the factory-gate. It will not consider taxes, trade margins and transport costs. It will give an account of the economy's efficiency in transferring goods and services from the producer to the consumer, who could be the final consumer or another producer using it as an input. A Working Group constituted to prepare a framework for PPI said that once the PPI is in place, there would not be any need for the WPI. The US had converted its wholesale price index into a producer price index in 1978.

References:
  1. http://www.financialexpress.com/news/about-inflation-the-wpi-and-cpi/89838/0
  2. http://dare.co.in/strategy/legal-policy/the-head-and-tail-of-wholesale-price-index-vs-consumer-price-index.htm
  3. http://www.livemint.com/2011/01/16230646/New-consumer-price-index-to-be.html
  4. http://www.livemint.com/2012/03/21212428/What-consumer-price-index-mean.html
  5. http://arthapedia.in/index.php/Consumer_Price_Index
  6. http://articles.economictimes.indiatimes.com/2010-12-25/news/27603076_1_price-indices-index-price-trends
  7. http://articles.economictimes.indiatimes.com/2010-12-30/news/27629273_1_wpi-series-new-index-ppi
  8. http://blog.securities.com/2012/03/indias-wholesale-price-index-weekly-and-monthly/
  9. Economic Survey 2012, pp75.

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