WPI, CPI AND INFLATION

PRESENTED BY-
ISHITA NAVNEET
EKTA C. SANGHVI
ANISH KUMAR GOEL
BAGISH JHA
 Wholesale Price Index
• First published in 1902 – was the major
economic indicators available for the policy
makers, till the CPI came in 1970’s
• It measures the change in average price level of
goods traded in the wholesale market.
• In India price data for 435 commodities is
tracked by the WPI and it is an indicator of
movement in prices of commodities in all trades
and transactions.
• It is also the price index available on a weekly
basis- shortest possible time lag (2 weeks)
• ((B-A)/A)*100

• For ex. If the wholesale price index was 178 and today it is
185 then, the inflation would be 3.93% over the sample year

Choice of the Base Year

• Going by the well known criteria that the Base Year being
chosen have the desired properties of being (i) a normal
year i.e., a year in which there are no abnormalities in the
levels of production and trade and in the price levels and
price variations, (ii) a year for which reliable price and other
required data are available and (iii) a year as recent as
possible

 Inflation rate stood at 0.44% for the week ended March 7

this year. It was 2.43% in the previous year.
 LITTLE RELIEF FOR THE
COMMON MAN
Inflation Rate %
All Commodities 0.44
Primary 4.38
Food 7.35
Fuel -5.95
Manufacturers -0.75
Main Items Still
Expensive
Sugar 22.37
Pulses 10.97
Cereals 10.16
 WPI needs correction
• Must reflect the consumption pattern of the
people in order to truly reflect the price rise
• Consumption patterns change with the increase
in income
• The subscribed number of price quotation to be
received for assessing changes in WPI is 1918
quotations, whereas Indian agencies responsible
for calculating WPI receive not more than 1200
quotations. So price spread information is not
even.
• Out of 435 commodities, more than 100 commodities are
ceased to be important from consumer point of view so
the price changes in those 100 commodities does not
really affect the Indian consumers.

• The working group on WPI, headed by Planning

Commission member Abhijit Sen, has worked out a new
index. The base year of the new index will be upgraded
to 2000-01. And the basket of commod-ities will be
expanded to around 1,200 to reflect the post-
liberalisation consumption pattern.

• There is a huge difference between the provisional and

final index figure and it is sometimes more than 100
basis points difference between provisional figure and
final figure.
 WPI measures the general level of price changes at the
level of either the wholesaler or at the producer and does
not take into account retail margins.

• The importance of service sector can not be ruled out in

India but service sector are not duly accounted in WPI.
Service sector like health and education are important as
consumers are increasingly spending more money on
these items.

• WPI essentially measures the price changes from the

production side and not from the consumption side and
hence it is a lop sided viewpoint of consumers.
 Food Prices
• With most of India’s vast population living close to – or below – the
poverty line, inflation acts as a ‘Poor Man’s Tax’. This effect is
amplified when food prices rise, since food represents more than half
of the expenditure of this group. 

• Food inflation, continues to hover around the double-digit levels,

offering little respite despite the declining trend in the headline
inflation.

• There is no doubt that continuing food-based inflation is a worrying

sign

• Inflation in the overall food index (with a weight of 25.43 per cent in
the index) declined marginally to 7.5 per cent the latest week,
compared to 7.7 per cent last week, on account of fall in
manufactured food products.
• Mr Sajjan Jindal the President of another apex industry
body ASSOCHAM said reacting to the latest wholesale
price inflation figure released by the government, it was
heartening to note that it had slipped to 0.44% but its
reflection on primary food articles was yet to noticed
because the weightage of inflation on them was still
between 6% to 7%. He said that the reduced inflation
had shown its impact on prices of metals especially
copper, zinc, aluminium and even in steel and cement
and also manufactured goods whose prices had come
down.
Consumer Price Index
• A consumer price index (CPI) is a
measure of the average price of consumer
goods and services purchased by
households.
• It is a price index determined by measuring
the price of a standard group of goods
meant to represent the typical market
basket of a typical urban consumer.
• CPI is the official barometer of inflation in
many countries such as the United States,
the United Kingdom, Japan, France,
Canada,Singapore and China.
• The governments there review the
commodity basket of CPI every 4-5 years
to factor in changes in consumption
pattern.
• CPI is a measure of the overall cost of
goods and services bought by a typical
consumer.
• In the U.S. - The Bureau of Labor
Statistics reports the CPI each month.
• It is used to monitor changes in the cost of
living over time.
 How is the Consumer Price Index
calculated?
• Fix the basket: determine what prices are
most important to the typical consumer.
• The Bureau of Labor Statistics (BLS)
identifies a market basket of goods and
services the typical consumer buys.
• BLS conducts monthly consumer surveys
to set the weights for the prices of those
goods and services.
• Find the prices: Find the prices of each of
the goods and services in the basket for
each point in time.
• Compute the basket’s cost: Use the
data on prices to calculate the cost of the
basket of goods and services at different
times.
• Choose a base year and compute the
index: Designate one year as the base
year, making it the benchmark against
which other years are compared.
• Compute the index by dividing the price of
the basket in one year by the price in the
base year and multiplying by 100.
• Compute the inflation rate - The
inflation rate is the percentage change in
the price index from the preceding period.
What is in the CPI’s basket?
Housing

4%
4% Transportation
6%
6% Food & Beverages
41%
6%
Education &
communication

16% Medical Care

17% Recreation

Apparel
 Problems
• Substitution Bias:
• The bundle does not change in the short run to
reflect consumer reaction to changing relative
prices.
• Consumers substitute towards goods that have
become relatively less expensive.
• CPI is computed assuming a fixed basket of
goods.
• The index overstates the increase in cost of
living by not considering the substitution by the
consumer.
 Continued..
• New Goods:
• The bundle does not reflect the effects of new
products that typically go down in price after
introduction.
• New products result in greater variety, which in
turn makes each dollar more valuable.
Consumers need fewer dollars to maintain any
given standard of living.
• The CPI is based on a fixed basket of goods and
does not reflect the change in the purchasing
power of the dollar.
 Continued…
• Quality Changes:
• Higher market prices usually include quality
changes that do not necessarily represent a
higher cost of living.
• If the quality of a good decreases from one year
to the next, the value of a dollar falls (cost of
living rises), even if the price of the good stays
the same.
• If quality increases, the true cost of living may be
less even though some goods cost more.
 CPI Indices in India

• CPI UNME (Urban Non Manual

Employees)
• CPI AL (Agricultural Labour)
• CPI RL (Rural Labour)
• CPI IW (Industrial Workers)
 Index Index
UNME for for
GROUP Weight Jan Jan % Change
2009 2008

Food, beverages, Tobacco 47.13 585 513 14

Fuel and light 5.48 637 590 8

Housing 16.41 582 550 5.8

Clothes, bedding and footwear 7.03 464 453 2.4

Miscellaneous 23.95 567 517 9.7

General Index (All Groups) 100 574 520 10.4

Index Base Year All India General Index
Number
December 2008 January 2009

CPI for 2001 = 100 147 148

Industrial
Workers

January 2009 February 2009

CPI for 1986-87 = 100 461 462

Agricultural
Labourers

CPI for 1986-87 = 100 461 462

Rural
Labourers
 Is it possible to shift to CPI for
calculating inflation?
• WPI does not properly measure the exact price
rise an end-consumer will experience because,
as the same suggests, it is at the wholesale level
• Decision to choose which CPI index will be risky.
• CPI is reported on monthly basis with a huge
time lag whereas WPI is published weekly.
• In India, inflation is calculated on weekly basis.
 Inflation
• Inflation is a rise in the general level of prices of
goods and services in an economy over a period of
time
• Hyperinflation is inflation that is very high or "out of
control", a condition in which prices increase rapidly
as a currency loses its value
• Deflation is a sustained decrease in the general price
level of goods and services. Deflation occurs when
the annual inflation rate falls below zero percent,
resulting in an increase in the real value of money
• Disinflation is a decrease in the rate of inflation
 Effects
• Decline in the real value of money—a loss
of purchasing power in the medium of
exchange which is also the monetary unit
of account.
• Adverse effects on the economy.
Discourages investment and saving. High
inflation may lead to shortages of goods if
consumers begin hoarding out of concern
that prices will increase in the future.
 Calculating Inflation
If we have the WPI values of two time periods, 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.
• Calculation based on WPI
• Base year 1993-94. Does not reflect the
current consumption pattern of the Indian
society
• Weightage of 26.9 per cent only for food in
WPI
 Proposed Changes
• The government wants adopt a revised
Wholesale Price Index (WPI)
• Instead of the current 435 commodities, the
revised WPI will have 980 commodities
• WPI rationalized by incorporating new items,
removing unimportant items and
amalgamating similar items.
• The base year will also be revised to 2004-05
from the current base year of 1993-94. A
more accurate figure for inflation.
Case Study
 Hyperinflation in Zimbabwe
• an economic shock that reduces
government revenues or increases
expenditures
• a weak political system that prevents the
government from raising taxes or cutting
spending to bring the budget back in
balance and
• a resort to money creation to finance the
deficit.
 How it all began
• In the late 1990s the government increased spending
dramatically
• In 1997 when large payments were made to war veterans
• In 1998 when Zimbabwe became embroiled in a war in the
Democratic Republic of the Congo.
• In 2000, the Mugabe government began confiscating land
from white farmers. Agricultural production and exports
plummeted, reducing tax revenues further.
• The government began relying on the central bank – the
• Reserve Bank of Zimbabwe – to finance the deficit through
money creation.
• The inflation rate, which had been 15 percent in 1990 and 56
percent in 2000, rose to over 1000 percent by 2006. By May
2008 the inflation rate was 2.2 million percent. By June it was
11.2 million percent and by July it was 231 million percent.
 What Reserve Bank of Zimbabwe
did
• System of multiple exchange rates that permits
people with government connections to import
goods from abroad on favorable terms and
resell them to the public at a huge profit.
• Provides subsidies to important sectors
including government, public enterprises,
exporters, and agriculture.
• In August 2008 the government announced a
currency reform that removed ten zeros from
all denominations of currency.
 The solution………………
• Political Stability
• Reducing quasi‐fiscal expenditures
• Eliminating the system of multiple
exchange rates
• Price controls, and having the Reserve
Bank establish strict monetary targets
• spending cuts, tax increases, establishment
of monetary targets, reform of monetary
and fiscal policymaking institutions
 References
• Coorey, Sharmini , Jens R. Clausen, Norbert
Funke, Sònia Muñoz, and Bakar Ould‐
Abdallah, “Lessons from High Inflation
Episodes for Stabilizing the Economy in
Zimbabwe,” IMF Working Paper 7‐99, April
2007.
• National Informatics Centre
• RBI
• Aroll D’Souza – Macroeconomics, PHI, 2004