Measuring Inflation

Inflation can be measured in different ways. One method is to use the Implicit Price Index (IPI) often
called the Gross National Product (GNP) deflator

Another method of measuring the inflation is to use a price index. Popular measures are WPI and CPI

The price index is an indicator of the average price movement over time of a fixed basket of goods and
services.

Separate series of index numbers are compiled to capture the price movements at retail and wholesale
level in India.

Wholesale Price Index

Inflation rate calculated on the basis of the movement of the Wholesale Price Index (WPI) is an important
measure to monitor the dynamic movement of prices.

From the week commencing January 10, 1942. The index was calculated as the geometric mean of the
price relatives of 23 commodities

Statement of weights, no of items and no of quotations (Present WPI series 2004-05 base)

No of
  Weight No of Items Quotations
All Commodities 100 676 5482
Primary Articles 20.12 102 579
Fuel and Power 14.91 19 72
Manufactured Products 64.97 555 4831

The National Industrial Classification (NIC- 98) being generally followed

The weighting diagram for the new WPI series has been derived on the basis of Gross Value of Output
(GVO).

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Method of Calculation

It is calculated on the principle of weighted arithmetic mean, according to the Lasperyre’s formula,
which has a fixed base- year weighting diagram operative through the entire life span of the series.

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The formula used is:

Price relatives are calculated as the percentage ratios, i.e., by dividing the current price by the base period
price and multiplying the quotient by 100.

The commodity index is arrived at as the simple arithmetic average of the price relatives of all the
varieties included under that commodity.

An example of compilation of WPI for a particular item having 11 Quotations is given below:

WPI for the particular item is the average of the price relatives, i.e, 202.1

Seasonal Items:

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There are a number of agricultural commodities, especially some fruits and vegetables, which are
seasonal in their availability and whose prices are quoted only during a particular period of the year.

When a particular seasonal item disappears from the market and its prices cease to get quoted, the index
for such an item ceases to be compiled and its weight is distributed over the remaining items within the
concerned sub- group on a pro- rata basis.

Linking Factor:

In order to maintain continuity in the time series data on wholesale price index, it is imperative to provide
a linking factor so that the new series, when released, may be compared with the outgoing one.

The Office of the Economic Adviser has been using the arithmetic conversion method to link the various
prices index series. The linking factor for the three broad groups of commodities WPI are as follows:

Data Collection:

Data collection is completely voluntary for CPI

Data on Primary Articles, fuel & power are mainly collected through administrative ministries/
departments. For manufacturing, some govt. departments and mainly from leading manufacturers. There
is online data submission facility to manufacturing sector to avoid irregular reporting.

WPI/PPI

Producer Price Index is more around the world compared to WPI. It measures the average change in the
selling prices received by domestic producers for their output.

PPI has broader coverage in terms of products and industries and conceptually similar to National
Accounts statistics.

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Comparison of WPI between the Old Series (1993- 94) and the New Series (2004- 05)

Primary Articles

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Fuel and Power

Manufacturing

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 Consumer Price Index

Consumer Price Index (CPI) measures the changes over time in the level of prices of goods and services
that a reference population acquires, use, or pay for consumption.

There are four CPIs compiled and released at national level on monthly basis. These are

1. CPI for Industrial Workers (IW),

2. CPI for Agricultural Labourers (AL),
3. CPI for Rural Labourers (RL), and
4. CPI for Urban Non-Manual Employees (UNME)

First three are compiled by the Labour Bureau in the Ministry of Labour and Employment, the fourth by
the Central Statistical Organisation (CSO)

In normal economic situations, the Laspeyres’ index shows an upward bias (in relation to the true cost of
living index) with the passage of time while the Paasche’s index shows a downward bias.

It is for this reason that Irving Fisher, a renowned econometrician, constructed an ideal index as the
geometric mean of the Laspeyres’ and Paasche’s indices. Since the geometric mean lies in between the
two and hence, it is the nearest to the true cost of living index.

The Fisher’s ideal index is given by:

First part is Laspayer’s formula (With every successive current period only Pn’s in the formula would
naturally vary while the other terms are held constant over the whole life of the index series. ) and second
part is Paasche’s formula (where qn replaces the qo from previous formula)

Paasche’s formula is seldom used in practice mainly because of the operational difficulty of conducting
family budget enquiry during every successive period for which the index is compiled.

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The consumption groups adopted in the series of Consumer Price Index Numbers for Urban Non-
Manual Employees [(CPI(UNME)] released at national level, are as follows:-

1. Food, Beverages and Tobacco

2. Fuel and light
3. Housing
4. Clothing, Bedding and Footwear and
5. Miscellaneous

Those items of expenditure which do not belong to any one of the groups mentioned from 1 to 4 above,
are relegated to the last group

Consumer Price Index for Industrial Workers

For the purpose of computing the index, these items of expenditure were classified into following
groups:-

1. Food (including non-alcoholic beverages)

2. Pan, Supari, Tobacco and Intoxicants
3. Fuel and Light
4. Housing
5. Clothing, Bedding and Footwear
6. Miscellaneous.

Consumer Price Indices for Agricultural Labourers and Rural Labourers

The items of consumption expenditure were classified into following five groups:-

1. Food
2. Pan, Supari, Tobacco and Intoxicants
3. Fuel and Light
4. Clothing, Bedding and Footwear
5. Miscellaneous.

Computation of Index

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The formula can be expressed as:-

expression qo po denotes the expenditure on an item in the base period and is termed as the weight and (p
n / p o) is called Price Relative, which is the ratio of the current price to base price of an item.

Prices are collected at retail level in the specific localities through household surveys and cross checking
it with other sources.

Money Stock Measures

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Growth in Money Supply

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 Macroeconomic Aggregates

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The fiscal deficit is the difference between the government's total expenditure and its total receipts
(excluding borrowing). 

Revenue deficit is the difference between the government’s current (or revenue) expenditure and total
current receipts (that is, excluding borrowing) and (b) capital expenditure.

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RBI Key Rates(As on 31st Jan 2013)

Policy Rates

Bank Rate: 8.75%

Repo Rate: 7.75%

Reverse Repo: 6.75%

Reserve Ratios

Cash Reserve Ratio: 4.25%

Statutory Liquidity Ratio: 23%

Lending/Deposit Rates

Base Rate: 9.75- 10.5%

Savings Deposit Rate: 4%

Term Deposit Rate: 8.5- 9%

G Sec Market

91 Day Treasury Bill: 7.93%

182 Day Treasury Bill: 7.94%

365 Day Treasury Bill: 7.83%

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Money Market

Call Money: 6.75- 7.85 %

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