You are on page 1of 15

INFLATION

IMPACT OF OIL RISE ON


INFLATION
What is Inflation?
Inflation is a rise in the general level of prices of goods and
services over time. "Inflation" is also sometimes used to refer to a
rise in the prices of some specific set of goods or services, as in "
commodities inflation" or "core inflation". It is measured as the
percentage rate of change of a price index
Commodities Inflation
A commodity price index is a fixed-weight index or average of
selected commodity prices, which may be spot or futures prices.
It is designed to be representative of the broad commodity asset
class or a specific subset of commodities, such as energy or
metals.

The constituents in a commodity price index can be broadly


grouped into the following categories:

V.Energy

VII.Metals
Base Metals
Precious Metals

lll. Agriculture
Grains
Softs
Livestock
Core Inflation
Core inflation is a measure of inflation which excludes certain
items that face volatile price movements e.g. food products and
energy.
The preferred measure by the Federal Reserve of core inflation
in the United States is the core
Personal consumption expenditures price index. This is based
on chained dollars.
The concept of core inflation as aggregate price growth
excluding food and energy was introduced in a 1975 paper by
Robert J. Gordon. This is the definition of "core inflation" most
used for political purposes. Analysis by the
Federal Reserve Bank of New York indicates that this measure
is no better than a moving average of the
Consumer Price Index as a predictor of inflation.
How does India calculates Inflation?

India uses the Wholesale Price Index (WPI) to calculate and then
decide the inflation rate in the economy.

History Of Wholesale Price Index (WPI)

WPI was first published in 1902.

It one of the more economic indicators available to policy makers


until it was replaced by most developed countries by the Consumer
Price Index in the 1970s

WPI is the index that is used to measure the change in the average
price level of goods traded in wholesale market.

In India, 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.
 It is also the price index which is available on a weekly basis with
the shortest possible time lag only two weeks.

The Indian government has taken WPI as an indicator of the rate of


inflation in the economy.

Inflation Rate calculation


The formula for calculating the Inflation Rate looks like this:

 ((B - A)/A)*100

So if exactly one year ago the Wholesale Price Index was 178
and today the WPI is 185, then the calculations would look like
this:

 ((185-178)/178)*100 or  (7/178)*100  or  0.0393*100 

which equals 3.93% inflation over the sample year.


Wholesale price Index 30-6-2007 till present date

Name of Commodity : ALL COMMODITIES


Type : Group Item
Weight : 100
Base Year : 1993-94 = 100

Date Index Date Index


30/06/2007 212.8 26/01/2008 219
28/07/2007 213.9 23/02/2008 220.9
25/08/2007 213.9 29/03/2008 226.7
29/09/2007 215.3 26/04/2008 229.1
27/10/2007 215.4 31/05/2008 231.1
24/11/2007 215.6 28/06/2008 238.1
29/12/2007 216.7 12/07/2008 239
The following table gives comparative details of the coverage of the
existing and revised series :-

No. of No. of
No. of items No. of items
Description quotations quotations
Existing Revised Existing Revised
1981-82 1993-94 1981-82 1993-94
 Primary
93 98 519 455
Articles

Fuel, Power,
Light  & 20  19 73 72
Lubricant

Manufactured 334 318 1779 1391


Products 
 
All
447 435 2371 1918
Commodities
The following table presents a comparative picture of the
weighting diagrams of the revised and the existing series:

Existing (1981-82) Revised (1993-94)


Description
series series

I.   Primary  Articles 32.30 22.02

II.  Fuel, Power, Light


10.66 14.23
& Lubricants

III.  Manufactured
57.04 63.75
Products
All Commodities 100.00 100.00
How oil prices rose over the
years ?

Here is a chronology showing key milestones in the


price of crude oil since 1970:

1970: The official price of Saudi crude oil is fixed at 1.80 dollars
per barrel

1974: Prices pass 10 dollars per barrel after the first oil shock,
sparked by the October 1973 Arab-Israeli war

1979: Prices pass 20 dollars as the Islamic revolution in Iran


causes a second oil shock

1980: Prices top 30 dollars for the first time and progress to 39
dollars in early 1981 at the height of the war between Iran and Iraq
Sept-Oct 1990: Prices sneak above 40 dollars per barrel amid
tension over Iraq's invasion of Kuwait

Aug 2005: Prices rise above 70 dollars when Hurricane Katrina hits
the Gulf of Mexico, damaging major offshore oil installations

Dec 28, 2007: Oil prices hit 97.79 dollars per barrel after the murder
of Pakistan's opposition leader Benazir Bhutto and following a sixth
successive weekly drop in US crude reserves

Jan 2, 2008: Prices hit 100 dollars

May 9, 2008: More problems in Nigeria increase concerns over


supply, with prices breaching 126 dollars

29 July 2008 : The price of OPEC basket of thirteen crudes stood at


121.73 dollars a barrel on Tuesday, 29/7/08,
Table 41 : Wholesale Price Inflation in India (year-on-year)
(Per cent)
Commodity   2006-07 2007-08 (P)
    (March 31) (March 29)
  Weight Inflation WC Inflation WC
1 2 3 4 5 6
All Commodities 100.0 5.9 100.0 7.4 100.0
1. Primary Articles 22.0 10.7 39.0 8.9 27.1
Food Articles 15.4 8.0 20.8 6.1 12.8
i. Rice 2.4 5.7 2.1 8.2 2.4
ii. Wheat 1.4 7.3 1.8 5.1 1.0
iii. Pulses 0.6 12.5 1.4 -1.8 -0.2
iv. Vegetable 1.5 1.2 0.3 15.8 2.7
v. s
Fruits 1.5 5.7 1.8 3.1 0.8
vi. Milk 4.4 8.4 5.8 7.6 4.3
vii. Eggs, Fish 2.2 9.4 3.8 1.5 0.5
and Meat
Non-Food Articles 6.1 17.2 15.6 11.1 8.9
i. Raw 1.4 21.9 3.5 14.0 2.1
Cotton
ii. Oilseeds 2.7 31.6 11.0 18.7 6.5
iii. Sugarcan 1.3 1.1 0.3 -0.4 -0.1
Minerals e 0.5 17.5 2.6 41.8 5.5
Commodity   2006-07 2007-08 (P)
    (March 31) (March 29)
  Weight Inflation WC Inflation WC
1 2 3 4 5 6
2. Fuel, Power, 14.2 1.0 4.0 6.7 19.4
Light and
Lubricants
i. Mineral 7.0 0.5 1.1 9.2 15.7
Oils
ii. Electricity 5.5 2.3 2.8 1.5 1.4

iii. Coal 1.8 0.0 0.0 8.8 2.3


Mining
3. Manufactured Products 63.8 6.1 57.3 7.1 53.5
i. Food Products 11.5 6.1 10.5 9.1 12.5
of which: Sugar 3.6 -12.7 -6.6 0.0 0.0
  Edible Oils 2.8 14.1 4.7 20.1 5.8

ii. Cotton Textiles 4.2 -1.0 -0.6 -5.1 -2.2


iii. Man Made 4.4 3.9 1.3 0.4 0.1
Fibres
iv. Chemicals and 11.9 3.6 7.1 5.4 8.2
Chemical
Products
  of which : 3.7 1.8 1.0 1.9 0.8
v. Fertilisers
Basic Metals, 8.3 11.3 17.4 20.0 25.9
Alloys and Metal
Products
  of which: Iron 3.6 8.1 6.0 34.2 21.0
and Steel
vi. Non-Metallic 2.5 9.0 3.6 6.0 2.0
Mineral Products
  of which: 1.7 11.6 3.2 5.1 1.2
vii. Cement
Machinery and 8.4 8.1 8.6 3.6 3.2
Machine Tools
  of which: 5.0 12.9 6.7 4.9 2.2
Electrical
Machinery
viii. Transport 4.3 2.0 1.2 4.7 2.1
Equipment and
Parts