Daily News Analysis

Inflation

14th July, 2021 Economy

Context:

  • Wholesale inflation in the country reached 12.07 percent in June, slightly lower than the massive 12.94 percent inflation in May, led by the constant rise in cost of fuel, including petrol, LPG and high speed diesel percolated down into all sectors of the economy.
  • India's retail inflation tapered down slightly to 6.26 per cent in the month of June 2021

About Inflation:

  • Inflation refers to a sustained increase in the general price level of goods and services in an economy over a period of time.
  • It considers the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc. • Inflation measures the average price change in a basket of commodities and services over time.
  • Rate of inflation is the rate of change in general price level which is measured as follows:

About WPI:

Wholesale Price Index (WPI)

  • Wholesale Price Index (WPI) measures the changes in the prices of goods sold and traded in bulk by wholesale businesses to other businesses instead of consumers.
  • The index basket of the WPI includes commodities falling under the three major groups namely Primary Articles, Manufactured Products and Fuel & Power.
  • The WPI basket has a total of 697 items with base year 2011-12:
    • Primary Articles: 117 items
    • Fuel & Power: 16 items
    • Manufactured Products: 564 items
  • The prices tracked are mandi price for agricultural commodities, ex-factory price for manufactured products, and examines prices for minerals. • Weightage given to each commodity covered in the WPI basket is based on the value of production adjusted for net imports.
  • WPI basket does not cover services.
  • In India, the Office of Economic Advisor (OEA), Department of Promotion of Industry and Internal Trade, Ministry of Commerce and Industry publishes the WPI.

The WPI is used for the following purposes:

  • To give the estimates of inflation at the wholesale transaction levels for the economy as a whole. It helps in timely intervention by the monetary authorities to check the inflation particularly in essential commodities before the price increase affects the retail prices.
  • Global investors also consider WPI as one of the key macro indicators for investment decisions.
  • The Government reviews and revises the base year of the WPI as a regular exercise to capture structural changes occurred in the economy and improve the quality, coverage, and representativeness of the indices.
  • The base year of All-India WPI has been changed from 2004-05 to 2011-12 in 2017 to bring it in line with the base year of other macroeconomic indicators like Index of Industrial Production (IIP) and the Gross Domestic Product (GDP).
  • The new series with base year 2011-12=100 was based on the recommendations of the Working Group which was constituted in 2012 under the chairmanship of Late Dr. Saumitra Chaudhuri.
  • WPI calculated with 2011-12 base year does not include taxes in order to remove the impact of fiscal policy.

 

About Consumer Price Index (CPI):

  • Consumer Price Index (CPI) measures the inflation at retail level.
  • Consumer Price Index (CPI) is a measure of change in retail prices of goods and services consumed by people in a given area with reference to a base year. • The main uses of CPI are the following:
  • It is widely considered as a barometer of inflation
  • Tool for monitoring price stability
  • The Reserve Bank of India is now using CPI(Combined) as the as the benchmark for its monetary policy tools like Repo Rate, Reverse Repo Rate.
  • According to the Agreement on Monetary Policy Framework signed between the Government and the RBI in 2015 the sole objective of the RBI is price stability and the Consumer Price Index (Combined) is measured as the target inflation.
  • Consumer Price Index compiled for four groups of consumers in India
    • CPI for Industrial workers CPI(IW)
    • Consumer Price Index for Urban Non-Manual Employees (UNME)
    • CPI for Agricultural Labourers CPI(AL)
    • CPI for Rural Labourers CPI(RL)