1.

Self study: ch7- inflation

and Biz cycle Ramesh
Singh. Only definitions &
impact. line by line
2. Lecture: selected Theory
and current (survey)
 Inflation related Topics

Index WPI, Survey Misc.

theory CPI, IIP analysis Indexes
2012 2015
Rs.10 Rs.15

𝐏𝐫𝐢𝐜𝐞 𝐢𝐧 𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐘𝐞𝐚𝐫

𝐈𝐧𝐟𝐥𝐚𝐭𝐢𝐨𝐧 = =15/10=50%
𝐏𝐫𝐢𝐜𝐞 𝐢𝐧 𝐁𝐚𝐬𝐞 𝐲𝐞𝐚𝐫
2012 ?? ?? 2015
Rs.10 Rs.15

𝐏𝐫𝐢𝐜𝐞 𝐢𝐧 𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐘𝐞𝐚𝐫

𝐈𝐧𝐟𝐥𝐚𝐭𝐢𝐨𝐧 =
𝐏𝐫𝐢𝐜𝐞 𝐢𝐧 𝐁𝐚𝐬𝐞 𝐲𝐞𝐚𝐫
 2012 2015

10 15

50 60

1000 1200
 But are all commodities
used in same quantity
and frequency every day?

1060 1275
𝐏𝐫𝐢𝐜𝐞 𝐢𝐧 𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐘𝐞𝐚𝐫 (𝟏𝟐𝟕𝟓)
𝐈𝐧𝐟𝐥𝐚𝐭𝐢𝐨𝐧 =
𝐏𝐫𝐢𝐜𝐞 𝐢𝐧 𝐁𝐚𝐬𝐞 𝐲𝐞𝐚𝐫 (𝟏𝟎𝟔𝟎)
20.3%
 Price ratio: Ratio x wt.
weight 2012 2015 2015/2012

30 10 15 1.5 45

60 50 60 1.2 72

10 1000 1200 1.2 12

Total 100 Inflation: Total 129

129/100 = 29%
Inflation: Laspeyres formula (German)
σ(𝑅 ∗ 𝑊)
𝐿= × 100
σ𝑊
𝑷𝒓𝒊𝒄𝒆 𝒊𝒏 𝒄𝒖𝒓𝒓𝒆𝒏𝒕
𝑾𝒉𝒆𝒓𝒆 "R" =
𝑷𝒓𝒊𝒄𝒆 𝒊𝒏 𝑩𝒂𝒔𝒆 𝒚𝒆𝒂𝒓
𝑾𝒉𝒆𝒓𝒆 W=weight assigned to
each commodity
Inflation: Laspeyres formula (alternate)
Laspeyres Paasche index

Geometric
mean 𝐶𝑃𝐼𝐹 = 𝐶𝑃𝐼𝐿 × 𝐶𝑃𝐼𝑃

Fischer index: removes item

substitution bias when prices rise
 Inflation Topics

Index WPI, Survey Misc.

theory
for more Ramesh CPI, IIP analysis Indexes
Ch.7
 calculating inflation

Basket?

Trend analysis
Who Economic Survey
calculates? Base year
 calculating inflation / production
Parameter WHO? Base
WPI Eco. Advisor, DIPP 2004
Laspeyres

2010
CPI CSO 2012
IIP CSO 2004
L5/P1 2004
.pptx GDP CSO 2011
 calculating inflation / production

Basket?

Trend analysis
Who Economic Survey
calculates? Base year
 IIP CPI
3 6
Cat. WPI cat.
3
cat.
MFG
Mining

Electricity
IIP: 8 core industries: ~38% of weight
1. Coal
2. Fertilizer
3. Electricity
4. Crude Oil
5. Natural Gas
6. Refinery Products
7. Steel
8. Cement
 IIP
1. Compared to 2011 – slowdown
2. 8 core industries- marginal ▲ Survey
analysis
3. Thermal power ▲
4. Steel production ▼ coz cheaper
imported ▲ and demand ▼
5. ▼ Gas- oil production bcoz
1. No big discoveries
2. ▼ old fields output
6. Fertilizer ▼ bcoz natural gas ▼
 IIP CPI
3 6
Cat. WPI cat.
3
cat.
 category2 category3

WPI
category1
 WPI: Total 676 items= headline WPI

Top 3 sub-weight
(DECREASING)

MFG. ~65%
1. Chem
2. Metal PRIMARY ~20%
3. Food 1. Food Fuel ~15%
2. Non-food 1.Oil
3. Mineral 2.Electricity
3.Coal
 Core inflation WPI = headline – (food and fuel)

Top 3 sub-weight
(DECREASING)

MFG. (65%)
1. Chem
2. Metal PRIMARY (20%)
3. Food 1. Food Fuel (15%)
2. Non-food 1.Oil
3. Mineral 2.Electricity
3.Coal
 IIP CPI
3 6
Cat. WPI cat.
3
cat.
 Food,
Beverage
Misc.-Health, Edu,
Housing
Recreation etc.
Although Fuel &
N/A in LIGHT
rural Clothing,
Core CPI= Footwear
Headline CPI
Minus (food & fuel) Pan, Tobacco,
Desi intoxicants
CPI weights assigned. Rural housing ignored.
 CPI
Base year 2010=> 2012
Weights assigned based on Reforms WEF
Consumer Expenditure survey 2011 Feb 2015
Wt. Household food and fuel
Expenditure (▼)
Wt. Non-food Expenditure (▲)
 CPI Reforms
CPI Before After Total Basket
Items ▲

Rural 437 448

Urban 450 460

 calculating IIP, WPI, CPI

Basket?

Economic Survey
Who Inflation Trend analysis
calculates? Base year
 Inflation
1. World Crude oil, edible oil, coal
price ▼(Chinese slowdown) Declined
2. Abundant production (FAO) because
3. FCI open sale of grains
4. Union allotted 5 million tonnes of
rice to BPL & APL
5. Potato, Onions under Essential
commodities Act
6. Fruits, veggies outside APMC
 Inflation
1. MEP for Potato & Onions▲
2. RBI Tight money policy Declined
throughout 2014 (8% Repo) because
L1/P1.pptx
3. Wage growth Moderate
1. Actual March end 2015. Budget 2014
Price
2. 500 crores stabilization
3. Price Stabilization Fund fund
Management Committee
(PSFMC)
4. Chairman: Secretary of Agri.
department
5. Interest free Loan to union and
state agencies as “working
capital”
 Budget 2014
1. Buy perishable agro. From
Price
farmers
stabilization
2. Sell cheap @end user fund
3. Initial focus onion potatoes.
4. States to setup their own funds-
contribution 50:50 (Gen.), 75:25
(NE)
 Inflation Topics

Index WPI, Survey Misc.

theory CPI, IIP analysis Indexes
PPI: Both goods + services (WPI Inflation
only goods)
PPI: Inflation without TAXES. (WPI Producer’s
includes taxes & APMC levies) price index
Measure price change from seller’s
perspective
Most OECD nations use PPI
Better sync. With System of
National Account (SNA), more
items, Broader coverage.
 Inflation
Planning commission’s Abhijit Sen
and Saumitra Chaudhuri
Producer’s
Committees advocated PPI
price index
Economic Advisor, DIPP initiated.
Sought Japanese help.
Prof.BN Goldar Committee (Sep
2014)
 Inflation
Service covered? WPI- no, CPI-
partial, IIP- no. Service
Hence SPI on advice of Prof. CP performance
Chandrasekhar Committee index
by CSO
 Index of service production (ISP) Base year 2004

Railway Banking Postal Telecom

 Inflation
1. London based Baltic exchange
2. Daily data Baltic dry
index
3. Cost to transport raw material by
sea
4. ▲ = world economy to grow
5. ▼ = economy to slowdown
Baltic dry Index (Survey Page 116)
 Inflation
1. Inflation expectation survey for
households Household
2. RBI Since 2005 expectation
3. Covering 5k houses in 16 cities
4. 3 months and 1 year ahead.
5. Dec 2014 data: households
expected moderate inflation
 Misc. indexes

inflation production
PPI ASI
SPI
OBICUS
Baltic
Household SBI
 index
1. Order Books, Inventories and
Capacity Utilization Survey
OBICUS
2. RBI To assess consumption &
investment demand
3. ~2500 mfg companies
4. Quarterly released
5. Survey says it (▲)
 index
1. Annual survey of industries by
CSO
ASI
2. Registered units in Factories act
1948 (10 workers- with power; 20
workers without power)
3. Electricity companies yes.
4. Movie companies, personal
service etc. surveyed but DATA
not tabulated.
 index
1. Defense, oil, hotel café,
computer, technical training inst.
ASI
And other services excluded
2. ~2.17 lakh units covered in
2012’s survey
3. Top 5 industrialized states:
Maharashtra, Guj, TN, Karnataka,
UP
 index
1. HSBC’s purchasing manager
index – economic activity. Private
2. SBI composite index (launched entities
Dec 2014)
3. Monthly and yearly index
4. 0-100 scale
5. >50 = Economic growth
6. <50 = Economic contraction
 SBI index
1. Loan portfolio
2. Consumer Expenditure 5 Parameters
covered
3. Mining
4. Inflation & interest rates
5. Exchange rates
 Ranking
FTP-2015
TPP, RCEP