analysis of Indian inflation rate based on statistical tools

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analysis of Indian inflation rate based on statistical tools

Attribution Non-Commercial (BY-NC)

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Abstract ......................................................................................................................................................... 2 1. Introduction ............................................................................................................................................... 3 1.1. 1.2. 1.3. 1.4. Inflation Measurement method in India ........................................................................................ 3 Consumer price index (CPI) ......................................................................................................... 3 Wholesale price index (WPI) ........................................................................................................ 4 Inflation rate calculation in India based on WPI ........................................................................... 5

2. Inflation based on wholesale price index .................................................................................................. 6 2.1. WPI of All commodities .................................................................................................................... 6 2.2. WPI of primary articles ...................................................................................................................... 7 2.3. WPI of food articles ........................................................................................................................... 8 2.3. WPI of non-food articles .................................................................................................................... 9 2.4. WPI of fuel and power ..................................................................................................................... 10 2.5. WPI of manufactured products ........................................................................................................ 11 3. Inflation based on consumer price index ................................................................................................ 12 3.1. CPI combined................................................................................................................................... 12 3.2. CPI rural ........................................................................................................................................... 13 3.3. CPI urban ......................................................................................................................................... 14 4. Inflation rate based on WPI for 2012-13 ................................................................................................ 15 5. Inflation rate based on CPI for 2012-13.................................................................................................. 15 6. Conclusion .............................................................................................................................................. 15

Abstract

Analysis on Indian inflation rate based on whole sale price index (WPI) and consumer price index (CPI). We were collected data from 2004-2005 financial year to 2013-2014(up to July) financial year for WPI and 2010-11(starting from January) financial year to 2013-14 (up to July) financial year for CPI. Inflation rate has been calculated based on both WPI and CPI and seen the effects of seasonal indices and estimated the trend line by using available statistical tolls in Microsoft excel.

1. Introduction

Prices move along with the fluctuations in business activities. These movements are termed as inflation and also disinflation, deflation, reflation. Inflation is a persistent and substantial rise in the general level of prices. The prices of different commodities may vary at different rates and in different directions. Some may increase, whereas the others may decline. However, such price changes cannot be termed as inflation. Similarly, a onetime increase in general price level is not considered as inflation. A onetime increase in price level and contrasts it with a continuous increase in the price level is termed as inflation. Inflation results in a fall in the money i.e., the exchange value of money declines. 1.1.Inflation Measurement method in India Many developing countries use changes in the Consumer Price Index (CPI) as their central measure of inflation. However, this method is unsuitable for use in India, for structural and demographic reasons. CPI numbers are typically measured monthly, and with a significant lag, making them unsuitable for policy use. Instead, India uses changes in the Wholesale Price Index (WPI) to measure its rate of inflation. The WPI measures the price of a representative basket of wholesale goods. In India, this basket is composed of three groups: Primary Articles (20.1% of total weight), Fuel and Power (14.9%) and Manufactured Products (65%). Food Articles from the Primary Articles Group account for 14.3% of the total weight. The most important components of the Manufactured Products Group are Chemicals and Chemical products (12%); Basic Metals, Alloys and Metal Products (10.8%); Machinery and Machine Tools (8.9%); Textiles (7.3%) and Transport, Equipment and Parts (5.2%). WPI numbers are typically measured weekly by the Ministry of Commerce and Industry. This makes it more timely than the lagging and infrequent CPI statistic. 1.2.Consumer price index (CPI) CPI is a current socio-economic indicator that needs to be constructed to measure the changes over time in the general level of prices of consumption goods and services that the reference population acquire, use or pay for consumption and to provide one of the basic parameters needed for economic planning and policy formulations by Government as well as private organizations. And to adjust the taxes, fines or fees levied by Government so as to maintain the burden upon the people paying taxes, fines, etc. constant in real terms and for obtaining constant-price estimates of consumption expenditure for national accounting and for indexation of wages and salaries in contracts of employment. This presumably avoids the need to renegotiate the contracts when prices rise and for indexation of prices in contracts for the supply of goods and services by firms. The new CPI series followed in India is CPI rural, CPI urban and CPI combined.

The common formula for the Consumer Price Index as defined would be Total cost of a fixed basket of goods in the current period ---------------------------------------------------------------- X 100 Total cost of the same basket in the base period

1.3.Wholesale price index (WPI) Wholesale price index measures the movement in the wholesale prices, i.e., the process charged by wholesalers once these have crossed the production stage, reflecting the second commercial transactions. Beside the prices of raw materials, semi-finished and final goods, the prices of imported tangible goods are also considered in the wholesale price index if they are transacted at the wholesale level. However, it excludes the prices of exported commodities.in many countries PPI is treated as WPI. WPI of the new series [with base year 2004- 05] was launched on 14th September, 2010. A representative commodity basket comprising 676 items. Those are mainly divided into primary article, food articles, non-food articles, fuel and power and manufactured goods. WPI is calculated on a base year and WPI for the base year is assumed to be 100. To show the calculation, lets assume the base year to be 1970. The data of wholesale prices of all the 435 commodities in the base year and the time for which WPI is to be calculated is gathered. Lets calculate WPI for the year 1980 for a particular commodity, say wheat. Assume that the price of a kilogram of wheat in 1970 = Rs 5.75 and in 1980 = Rs 6.10 The WPI of wheat for the year 1980 is, (Price of Wheat in 1980 Price of Wheat in 1970)/ Price of Wheat in 1970 x 100 i.e. (6.10 5.75)/5.75 x 100 = 6.09 Since WPI for the base year is assumed as 100, WPI for 1980 will become 100 + 6.09 = 106.09. In this way individual WPI values for the remaining 675 commodities are calculated and then the weighted average of individual WPI figures are found out to arrive at the overall Wholesale Price Index. Commodities are given weight-age depending upon its influence in the economy.

1.4.Inflation rate calculation in India based on WPI If we have the WPI values of two time zones, say, beginning and end of year, the inflation rate for the year will be, (WPI of end of year WPI of beginning of year)/WPI of beginning of year x 100 For example, WPI on Jan 1st 1980 is 106.09 and WPI of Jan 1st 1981 is 109.72 then inflation rate for the year 1981 is, (109.72 106.09)/106.09 x 100 = 3.42% and we say the inflation rate for the year 1981 is 3.42%. Since WPI figures are available every week, inflation for a particular week (which usually means inflation for a period of one year ended on the given week) is calculated based on the above method using WPI of the given week and WPI of the week one year before. This is how we get weekly inflation rates in India.

2.1. WPI of All commodities Descriptive statistics for the year 2012-13 of WPI of all commodities are Average WPI of all commodities is 167.61. Fifty percentage of WPI of all commodities values lies above 168.65 and other fifty percent values lies below. The dispersion exists from the mean value is 2.55. Highest WPI value is 170.9. Lowest WPI value is 163.5. Simple regression equation of WPI of all commodities from financial year 2010-11 to financial year 2013-14 (up to July) The regression equation representing month and inflation rate is y = -0.1203x + 10.735 i.e., Inflation rate = -0.1203*(month) + 10.735. For a unit change in month, the inflation rate is decreased by 0.1203. By using the equation we can project the values for inflation rate using month. Trend line for month and inflation rate of WPI of all commodities from financial year 2010-11 to financial year 2013-14 (up to July)

trendline

12 10 8 6 4 2 0 0 10 20 30 40 50 inflation rate Linear (inflation rate)

6

Descriptive statistics for the year 2012-13 of WPI of primary articles are Average WPI of primary articles is 219.96 Fifty percent of WPI lies above 220.5 and other fifty percent lies below The dispersion exists from the mean value is 3.29 Highest WPI value is 224.4 Lowest WPI value is 215 Simple regression equation of WPI of primary articles from financial year 2010-11 to financial year 2013-14 (up to July) The regression equation representing month and inflation rate is y = -0.3262x + 18.665 i.e., Inflation rate = -0.3262*(month) + 18.665 For a unit change in month, the inflation rate is decreased by 0.3262

By using the equation we can project the values for inflation rate using month Trend line for month and inflation rate of WPI of primary articles from financial year 2010-11 to financial year 2013-14 (up to July)

trend line

25 20 15 inflation 10 5 0 0 10 20 30 40 50 Poly. (inflation)

Descriptive statistics for the year 2012-13 of WPI of food articles are Average WPI of food articles is 211.85 Fifty percent of WPI lies above 212.55 and other fifty percent lies below The dispersion exists from the mean value is 2.91 Highest WPI value is 215.4 Lowest WPI value is 206.1 Simple regression equation of WPI of food articles from financial year 2010-11 to financial year 2013-14 (up to July) The regression equation representing month and inflation rate is y = -0.22227x + 15.391 i.e., Inflation rate = -0.22227*(month) + 15.391 For a unit change in month, the inflation rate is decreased by 0.22227

By using the equation we can project the values for inflation rate using month Trend line for month and inflation rate of WPI of food articles from financial year 2010-11 to financial year 2013-14 (up to July)

trend line

25 20 15 10 5 0 0 -5 10 20 30 40 50 inflation Poly. (inflation)

2.3. WPI of non-food articles Descriptive statistics for the year 2012-13 of WPI of non-food articles are Average WPI of non-food articles is 201.92 Fifty percent of WPI lies above 202.3 and other fifty percent lies below The dispersion exists from the mean value is 4.76 Highest WPI value is 207.6 Lowest WPI value is 194.1 Simple regression equation of WPI of non-food articles from financial year 2010-11 to financial year 2013-14 (up to July) The regression equation representing month and inflation rate is = -0.4368x + 22.541 i.e., Inflation rate = -0.4368*(month) + 22.541 For a unit change in month, the inflation rate is decreased by 0.4368

By using the equation we can project the values for inflation rate using month Trend line for month and inflation rate of WPI of non-food articles from financial year 2010-11 to financial year 2013-14 (up to July)

trend line

40 35 30 25 20 15 10 5 0 -5 0 10 20 30 40 50

inflation Poly. (inflation)

2.4. WPI of fuel and power Descriptive statistics for the year 2012-13 of WPI of fuel and power are Average WPI of fuel and power is 186.41 Fifty percent of WPI lies above 188.6 and other fifty percent lies below The dispersion exists from the mean value is 6.08 Highest WPI value is 178.8 Lowest WPI value is 195.5 Simple regression equation of WPI of fuel and power from financial year 2010-11 to financial year 2013-14 (up to July) The regression equation representing month and inflation rate is = -0.1066x + 14.022 i.e., Inflation rate = -0.1066*(month) + 14.022 For a unit change in month, the inflation rate is decreased by 0.1066

By using the equation we can project the values for inflation rate using month Trend line for month and inflation rate of WPI of fuel and power from financial year 2010-11 to financial year 2013-14 (up to July)

trend line

18 16 14 12 10 8 6 4 2 0 0 10 20 30 40 50 inflation Poly. (inflation)

10

2.5. WPI of manufactured products Descriptive statistics for the year 2012-13 of WPI of manufactured products are Average WPI of manufactured products is 147.05 Fifty percent of WPI lies above 147.95 and other fifty percent lies below The dispersion exists from the mean value is 1.68 Highest WPI value is 148.7 Lowest WPI value is 143.8 Simple regression equation of WPI of manufactured products from financial year 2010-11 to financial year 2013-14 (up to July) The regression equation representing month and inflation rate is = -0.0537x + 6.9306 i.e., Inflation rate = -0.0537*(month) + 6.9306 For a unit change in month, the inflation rate is decreased by 0.0537

By using the equation we can project the values for inflation rate using month Trend line for month and inflation rate of WPI of manufactured products from financial year 2010-11 to financial year 2013-14 (up to July)

trend line

9 8 7 6 5 4 3 2 1 0 0 10 20 30 40 50 inflation Poly. (inflation)

11

3.1. CPI combined Descriptive statistics for the year 2012-13 of CPI combined are Average CPI of combined is 123.33 Fifty percent of CPI lies above 124.45 and other fifty percent lies below The dispersion exists from the mean value is 3.51 Highest CPI value is 127.5 Lowest CPI value is 117.1 Simple regression equation of CPI combined from financial year 2010-11 (from January) to financial year 2013-14 (up to July) The regression equation representing month and inflation rate is = 0.0517x + 9.2961 i.e., Inflation rate = 0.0517*(month) + 9.2961 For a unit change in month, the inflation rate is increased by 0.0517

By using the equation we can project the values for inflation rate using month Trend line for month and inflation rate of CPI combined from financial year 2010-11(from January) to financial year 2013-14 (up to July)

trend line

12 10 8 6 4 2 0 0 5 inflation Poly. (inflation)

y=

-0.0004x4

10 15

0.0158x3

0.2442x2

20

12

3.2. CPI rural Descriptive statistics for the year 2012-13 of CPI rural are Average CPI of rural is 124.5 Fifty percent of CPI lies above 126.1 and other fifty percent lies below The dispersion exists from the mean value is 3.62 Highest CPI value is 128.3 Lowest CPI value is 117.9 Simple regression equation of CPI rural from financial year 2010-11 (from January) to financial year 2013-14 (up to July) The regression equation representing month and inflation rate is = 0.0692x + 8.9129 i.e., Inflation rate = 0.0692*(month) + 8.9129 For a unit change in month, the inflation rate is increased by 0.0692

By using the equation we can project the values for inflation rate using month Trend line for month and inflation rate of CPI rural from financial year 2010-11(from January) to financial year 2013-14 (up to July)

trend line

12 10 8 6 4 2 0 0 5 10 15 20 inflation

Poly. (inflation)

13

3.3. CPI urban Descriptive statistics for the year 2012-13 of CPI urban are Average CPI of urban is 121.81 Fifty percent of CPI lies above 122.25 and other fifty percent lies below The dispersion exists from the mean value is 3.37 Highest CPI value is 126.5 Lowest CPI value is 116.1 Simple regression equation of CPI urban from financial year 2010-11 (from January) to financial year 2013-14 (up to July) The regression equation representing month and inflation rate is = 0.0123x + 10.012 i.e., Inflation rate = 0.0123*(month) + 10.012 For a unit change in month, the inflation rate is increased by 0.0123

By using the equation we can project the values for inflation rate using month Trend line for month and inflation rate of CPI urban from financial year 2010-11(from January) to financial year 2013-14 (up to July)

trend line

14 12 10 8 6 4 2 0 0 5 10 15 20

inflation Poly. (inflation)

14

Inflation rate of all commodities is 7.35 Inflation rate of primary articles is 9.80 Inflation rate of food articles is 9.90 Inflation rate of non-food articles is 10.52 Inflation rate of fuel & power is 10.33 Inflation rate of manufactured goods is 5.411

Inflation rate for CPI combined is 10.56 Inflation rate of CPI rural is 10.74 Inflation rate of CPI urban is 10.41

6. Conclusion

In India for the purpose of calculation of inflation rate, government or central authority uses changes in the wholesale price index (WPI) to measure its rate of inflation. However consumer price index (CPI) is unsuitable for use in India for structural and demographic reasons. So concerning the previous few years WPI data and estimated the inflation and it is mostly effected by non-food articles followed by fuel & power while concerning CPI data. Inflation effect is high in CPI rural.

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7. References Handbook of Statistics on Indian Economy in reserve bank of India: http://www.rbi.org.in Inflation rate calculation in India based on WPI in http://www.marketcalls.in Veena Keshav Pailwar: Economic Environment of Business, (2012), (Prentice Hall India). http://www.imf.org/external/index.htm http://worldbank.org/

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