Understanding WPI and CPI: Calculating Inflation, Study notes of Economics

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HOW TO CALCULATE

INFLATION?

WHAT IS INFLATION?

 Rise in prices

 Fall in purchasing power

PRICE INDEX

The price index is an indicator of the average price

movement over time of a fixed basket of goods and

services. At present, separate series of index numbers

are compiled to capture the price movements at retail

and wholesale level in India.

WHOLESALE PRICE

INDEX

 (^) Published in 1902

 (^) measures the change in the average price level of goods traded

in wholesale market

 (^) available on a weekly basis with the shortest possible time lag

only two weeks, announced on every Friday

 (^) a total of 435 commodities data on price level is tracked through

WPI which is an indicator of movement in prices of commodities in all trade and transactions

Calculation of Inflation using WPI

CHOICE OF BASE YEAR

Criteria for the selection of base year are:

(i) a normal year i.e. a year in which there are no

abnormalities in the level of production, trade and in

the price level and price variations,

(ii) a year for which reliable production, price and other

required data are available

(iii) a year as recent possible and comparable with

other data series at national and state level.

Current Base year for the WPI : 1993-

STEPS TO CALCULATE INFLATION

STEP 1: Calculate price relative for each price quote,i.e. (P1/Po)X

STEP 2 : Commodity/item level index = simple arithmetic average of the price relatives of all the varieties (each quote) included under that commodity.

STEP 3 : I= S (Ii x Wi) / S Wi

I = Index numbers of wholesale prices of a sub- group/group/ major group/ all commodities S = represents the summation operation, Ii = Index of the ith item / sub- group/ group/ major group. Wi = Weight assigned to the ith item of sub- group/group/ major group.

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.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.

CONSUMER PRICE INDEX

ADVANTAGE

It actually measures the increase in price that a consumer

will ultimately have to pay for.

GDP DEFLATOR

The GDP deflator (implicit price deflator for GDP) is a

measure of the change in prices of all new, domestically

produced, final goods and services in an economy.

A price deflator of 50 means that the current-year price

is half the base year price - price deflation

Reflects up to date expenditure pattern

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